CPI spiked to a high of 7.35% primarily driven by food inflation (Onion & Pulses), however, the core inflation @ 3.75% is still below the RBI range of 4% ~ 6%. With headline inflation above 7%, we will likely not see a rate cut for the upcoming quarters.
This should not cause panic in the system for two reasons:
Food inflation (within normal levels) is good from the farmers‘ point of view and will help in elevating some of the rural distress which in turn will help in boosting sentiments. Core inflation is still below 4% and with oil cooling down again the risk of its crossing 4% looks improbable.
With new crops into the market and good monsoons, the prices of vegetables are bound to come down in the upcoming quarter.
Core inflation has reported an uptick because of the increase in mobile tariff and transport cost. Mobile tariff increase is here to stay. Transport cost is expected to come down because of lower crude prices, better vehicle utilisation due to implementation of Fastag, e-invoicing schemes. Core inflation may see a further uptick due to increase in BSVI vehicle prices, cement prices and general increase in global commodity prices. Anticipated increase maybe offset by a reduction in food inflation and with headline inflation expected to be back below 5% by Q2 of CY20, RBI will have headroom to reduce interest rates.
In my opinion, Growth should remain the primary focus for the next year and few slippages both at inflation and deficit figures would be an acceptable trade-off as it will give headroom for deeper structural reforms the country needs. Government has implemented most of its electoral agenda in the past year and right now need to focus on utilizing their political capital in passing structural reforms like land and labour reforms along with bringing petrol and diesel under GST. Annual budgets have lost much of its significance in the past few years and I am looking at it more like a vision statement than anything else.
