The fall in consumer price index inflation to 6.46 per cent in September is significant for more reasons than one. First, it is the lowest inflation number since the start of the new CPI series from January 2012. Second, this is the fourth successive month when CPI inflation has ruled below 8 per cent, which is the Reserve Bank of India’s target for January 2015. The latest drop, from 7.73 per cent in August, is indeed rather sharp and takes the inflation rate closer to the RBI’s 6 per cent target for January 2016. Third, the decline has taken place notwithstanding a somewhat deficient south-west monsoon and poorly distributed rainfall, both spatially as well as temporally. This probably suggests that the fall we are seeing is real. The fact that inflation based on the wholesale price index has dipped to 2.38 per cent in September — a 59-month low — is only further confirmation of what appears a clear trend.
It is another matter, however, whether the RBI believes that inflationary pressures have receded enough to justify interest rate cuts. The central bank may well take the position that the current decline is not structural, but flows out of the ‘base effect’ of higher inflation during this time last year. But there is one thing the RBI must take into account: global crude prices, which have touched about $85 a barrel (Indian basket) from the over $105 levels three months back. This, along with a stable rupee, has enabled oil marketing companies to reduce retail petrol prices and possibly repeat the same for diesel in the coming days. The impact of this in tempering the public’s inflationary expectations is not small. The RBI also cannot be oblivious to a developing global bear market in most agri-commodities, which again provides reasonable insulation from renewed inflationary pressures back home.
It is an opportune time for the Centre and the RBI to engage in a dialogue on a monetary policy framework that balances inflation control with growth promotion objectives. Ideally, it is the Centre that should specify an inflation target for the RBI; at the same time, the latter should have the full freedom to set interest rates or employ other monetary measures to achieve the same. Now, it is the RBI that decides on both the inflation target as well as policy rates without really factoring in growth concerns. We have clearly reached a point where industrial growth at 0.4 per cent should worry our policymakers more than retail inflation at below 6.5 per cent, and possibly heading lower. The Centre must use the opportunity from falling world crude prices to rationalise fuel subsidies and show its seriousness about fiscal consolidation. This, by itself, should give the RBI sufficient reason to show greater monetary accommodation.