For September 2021, the retail inflation came in at just 4.35%. That marks a fall in inflation by 195 bps from the recent May-21 peak. However, that may not be a cause for celebration at this point.
Too much of base effect
While the fall in inflation is attributed to the fall in food inflation, it is less about the Kharif output and more about the base effect. Food inflation has always been cyclical in tandem with base price movements. However, the real issue is core inflation, which is elevated at close to 5.8% levels. Also, crude prices have gone up to $85/bbl and the downstream effects of higher crude prices cannot be underestimated. Once the base effect wanes, inflation could turn in higher.
Watch out for US inflation
For the month of September 2021, the US reported inflation at 5.4%. This is the highest level of inflation reported in the US in the last 13 years since global financial crisis of 2008. The US Fed has repeatedly underlined that this spike in inflation is driven by supply chain lags which are yet to be filled up. However, now even the US Fed is veering round to the view that this demand supply gap is likely to sustain for much longer than originally anticipated. That is the case in India also and the message for India from the US inflation is that high levels of inflation are not going away. India must keep a watch on the US inflation.
Growth looks to be stabilizing
One of the big takeaways from the IIP numbers of Aug-21 is that the industrial growth is finally scaling above its pre-COVID levels. On a monthly basis, all 3 IIP components viz. mining, electricity and manufacturing have grown over the corresponding 2019 figure. If you look at the cumulative figure for 2021, then overall IIP as well as mining and power are higher with only manufacturing tad lower than the 2019 levels. This is all the more important as it indicates that the IIP is growing despite the base effect waning. That shows that growth is coming from sustainable sources.
Likely to shift RBI policy
One big outcome of the inflation puzzle is that the RBI is now likely to adopt a modified approach to liquidity and rates. For example, with IIP back to growth even without the base effect, the big challenge for the central bank is the high inflation. Boosting growth can no longer be adequate justification for keeping rates low and policy stance as accommodative. Going ahead, the RBI is likely to be driven more by inflation concerns than by growth concerns. The dovish policy has addressed the growth concern but it has come at the cost of higher inflation. If the Fed shifts its stance, as is very likely by December, the RBI would not risk divergence. At that point, growth will not be the issue. It will be all about inflation control!
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