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ET Explains: Not all may be bad about India’s rising inflation

Retail inflation climbed to a six-year high of 7.35 per cent breaching the Reserve Bank of India’s upper band of 6 per cent for the first time since the Monetary Policy Committee was created. The wholesale inflation also crept up for the month of December.

The sharp spike in India’s retail inflation came on the back of rise in vegetable prices in general and onion prices in particular. Onion prices have risen by 400 per cent since March, food & consumer affairs minister Ram Vilas Pasvan said last month in the Lok Sabha.

According to SBI, if onion inflation is excluded from headline inflation, the figure comes out to be 4.48 per cent

But not all is bad about the remarkable spike witnessed in India’s inflation index. Here’s why:

The rise in retail inflation, though sharp, hides a more important statistic which is core inflation. Core inflation excludes the more volatile items – food & fuel from computation of the inflation index.

Even though consumer inflation has risen dramatically in the month of December, the core inflation is still muted because of subdued demand. This essentially means that once the vegetable prices cool down, the headline inflation figure will fall back within the comfort zone of the RBI.

Another silver lining is that the higher price of farm products will lift rural earnings which are crucial for an economic revival.

Moderately high inflation will lift nominal GDP growth which is projected at 7.5 per cent for FY20, a 42-year low.

But, on the other hand household budgets will see a higher outgo on food items which can shrink demand for other products, something that is not a pleasant news when the overall demand is already down.

Another downside is the risk of stagflation. Many economists have started raising the alarm over India entering stagflationary phase with growth stagnating and inflation creeping up to uncomfortable levels.

For now, as the inflation has breached the upped end of RBI’s spectrum, the central bank may not effect a rate cut anytime soon. The RBI will keep an eye on government’s finances when the Finance Minister presents the Union Budget on February 1. Any further rate cut decisions will be tied to the inflation trajectory and government’s fiscal math.

With inputs from Bureau

Source: Economic Times