Monetary policy review: Core inflation transitory, no need for RBI to panic, says Niti chief

Indian Express, June 07,2018

An “overreaction” by the Reserve Bank of India in its monetary policy review, which got underway Monday, is an area of concern for the Government, Niti Aayog Vice Chairman Rajiv Kumar told The Indian Express.
The visible increase in core inflation could just be a “transitory phase” and the central bank “shouldn’t panic into believing that this is a sign of inflationary expectations getting entrenched”, Kumar said.
Core inflation, which excludes food and fuel components, was at 5.92 per cent in April while general CPI (Consumer Price Index) inflation stood at 4.58 per cent in the same month. As core inflation rises, there is an expectation that the RBI may hike its key policy lending rate, or the repo rate.
The Monetary Policy Committee (MPC), the rate-setting body of the RBI, began its second bi-monthly review from June 4-June 6 in Mumbai.
Asked whether the RBI may overreact to rise in CPI inflation, Kumar said: “RBI’s overreaction is always a concern. The word is overreaction and the key is how you define overreaction. Here, the key is that core inflation is already higher than retail inflation. That’s something of a worry. I looked at the composition of core inflation. The three biggest contributors are health, education and real estate, a sector which has been down and is not finding buyers. But for some reason, prices have picked up in the real estate sector. The reason may be that housing allowance has been raised.”
He said all the three components adding to core inflation could be temporary and do not signal any permanent rise in inflationary expectations. “But the point is all these three could well be transitory. At the beginning of the fiscal year, everybody is raising fees and charges. So in my view, RBI shouldn’t panic into believing that this is sign of inflationary expectations getting entrenched, becoming generalised. So I would, therefore, define overreaction as to doing anything more than maintaining a pause at this stage,” he said.
The six-member MPC has kept benchmark interest rates unchanged at 6 per cent since June 2017, with a neutral stance. In the minutes of the last MPC meeting released in April, two members of the committee, RBI Deputy Governors Viral Acharya and Michael Patra, flagged the risks from core inflation, indicating a need to move towards a hawkish stance.
The MPC had forecast inflation to remain between 4.7-5.1 percent in the first half the current financial year. An uptick in the manufacturing and construction sectors boosted India’s real gross domestic product (GDP) to a seven-quarter high of 7.7 per cent in January-March, the last quarter of the 2017-18 financial year.
“Notwithstanding the clamour for a rate hike in market, we believe ground realities call for caution and not rate action,” as private consumption is yet to pick and rise in core inflation is not broad-based, State Bank of India’s Group Chief Economic Adviser Soumya Kanti Ghosh said in a note Friday.
“First, even as GDP numbers are strong, private consumption continues to lose pace dropping to 6.6% in FY18 from 7.3% in previous year. Second, current rise in Core inflation is quoted as the signal for rate hike in the next policy. Though the CPI inflation has increased by 221 bps since Jul’17, core inflation has increased by only 98 bps. If we further dissect the core inflation data, Housing and Transport accounts for 60% of total core increase. So is it unfair to say that jump in core inflation is more broad based,” Ghosh said.
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