The latest global financial developments and recent economic data in India together are raising fears that many major economies around the world, including India, may be headed for a debilitating standstill. Last week’s retail inflation reading for February from India’s NSO stood at 6.44%, clearly beliing the RBI’s recent forecast of Q4 inflation of 5.7%. With a CPI-based price gain of 6.52% in January, prices should soften sharply enough in March to pull down the headline number by over 230 basis points to around 4.1%, to justify the RBI’s forecast. A look at the components driving inflation shows that core inflation, which strips out the impact of food and fuel prices, still remained at 6.2% for the third month in a row, and is projected to reach a level of around 6% by May 2021. hovers over or above it. Core inflation has remained persistent despite the RBI raising its benchmark interest rate by 250 basis points since last May, indicating that monetary authorities are facing difficulty in paring down price gains by increasing credit costs in order to reduce the demand. Governor Shaktikanta Das and two other RBI members on the Monetary Policy Committee cited the worrying persistence of core inflation in their last policy meeting in February to justify the decision to tighten monetary policy.
Despite a marginal decline of five basis points in the overall food price index last month, the rise in prices in the food basket is also showing a depressing trend. Prices of the four major categories in the food basket that together account for more than a fifth of the consumer price index continued to register year-on-year inflation as well as sequential hardening. If inflation in key staples of cereals and products rose to 16.7% in February, the headline reading for milk and products rose to 9.65%, while for fruits it rose to 6.38% (from January’s 2.93%), while Spice readings slowed down. slightly to 20.2% (up from 21.1%). With predictions of a possible El Niño this year, the outlook for food prices is hardly reassuring. While policymakers will need to focus on controlling inflation, growing uncertainty about the pace of growth in advanced economies in the face of heightened risks of recession raises the risk that higher debt costs could further dampen consumption. Nevertheless, failure to generate lasting price stability can lead to stagflation. Unless supply-side measures such as GST rationalization and reduction in fuel prices are expedited, the overall macroeconomic outlook appears worrisome.