Centre-RBI disagreement deepens over inflation and rates cuts

Differences between the Centre and the Reserve Bank of India over interest rate cuts and inflation targeting appear to be intensifying. On Tuesday, Chief Economic Advisor (CEA) V Anantha Nageswaran stated that retail inflation is largely driven by a few key commodities— namely tomato, onion, potato (TOP), gold, and silver. Excluding these items, he noted, the inflation rate would drop to approximately 4 per cent.

This comes a day after Finance Minister Nirmala Sitharaman emphasised that bank interest rates will have to be far more affordable at a time when industries want to ramp up and move, building capacities. Commerce Minister Piyush Goyal last week also said the RBI must cut interest rates and that it is a flawed theory to consider food inflation for making a choice on cutting rates.

Speaking at SBI’s 11^th Banking & Economics Conclave, Anantha Nageswaran said: “We know that CPI (consumer price index-based) inflation is being very much influenced by a few commodities. If you take out tomato, onion, potato (TOP), gold and silver, the headline CPI rate is 4.2 per cent.

“So, items – TOP, gold and silver – that constitute 3.4 per cent by weight together account for more than one-third of 6.2 per cent inflation rate you have seen for October.”

The latest economic survey, which was put together by the CEA’s team, noted that India must take a re-look at its current inflation targeting framework and explore one that would target an inflation rate excluding the volatile food component.

This is in contrast to the RBI’s position. In his August monetary policy statement, RBI Governor Shaktikanta Das, emphasised that the monetary policy committee’s target is the headline inflation wherein food inflation has a weight of about 46 per cent.

“With this high share of food in the consumption basket, food inflation pressures cannot be ignored. Further, the public at large understands inflation more in terms of food inflation than the other components of headline inflation.

“Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably,” Das said.

Second and equally important is the reality that high food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation, he added. The rate-setting monetary policy committee (MPC) has kept the repo rate rock steady at 6.50 per cent in its last 10 consecutive meetings to stem inflationary pressures. The next policy meeting is scheduled in December.

Possibility of Trump imposing import tariffs

Meanwhile, the CEA noted that India has a bilateral trade surplus with the US in both goods and services.

To a question on the possibility of import tariffs being imposed under the Trump regime, he said: “So, there could be pressure...in some of the areas it will be advantageous and in some areas we may necessarily have to reduce some duties to become competitive.

“So, i don’t think it is necessary for us to assume that it will be negative for India....If the world export growth itself is going to be a challenge, so export, per se, will not necessarily be the most effective engine of growth for India.”

The Trump presidency may also be very useful in terms of keeping energy price affordable from the Indian point of view.

“And we need that to be able to grow, get resources to fund our energy transition, invest in new technology, R&D, etc...So, in that sense, the positives may end up outweighing the negatives,” the CEA said.