Rising crude oil prices along with higher tax component of petrol-diesel prices can generate additional tailwinds for inflation going forward
Retail inflation, as measured by the Consumer Price Index (CPI), moderated from 7.6% in October to 6.9% in November. This is primarily a result of moderation in food prices, although the non-food component of the CPI has also come down. While the November numbers mark an end to rising inflation since August, headline inflation continues to be above Reserve Bank of India’s upper limit of 6% and is unlikely to come down in the near future. Rising crude oil prices along with higher tax component of petrol-diesel prices can generate additional tailwinds for inflation going forward.
The fact that the current inflationary spike has come at a time when the economy needs every possible support to growth makes it a tricky situation for policymakers. RBI has kept the policy rate unchanged since May 2020 in view of rising inflation, even though the monetary policy stance has been kept accommodative. Some experts have pointed out that raising interest rates at this juncture will only end up attracting hot money from foreign markets which, while doing little to add the productive capacity in the economy, might hurt exports by forcing an appreciation of the rupee. A persistence of high inflation, especially in food items, might put a squeeze on household budgets and therefore mass demand.
The Centre will present its budget in 45 days. It will need to project a nominal GDP growth rate for budgetary calculations. On this count, a higher inflation could actually be of help as it will boost revenues. Taxes, after all, are a fraction of nominal, not real incomes. The short point is, policy will have to be vigilant about inflation in the coming days.