How Will Core Inflation Uptick Impact The MPC? | NDTV Profit
Transcript
00:00Hello and welcome. You're watching an NDTV Profit Special. Now, India's inflation data
00:14came in last evening and inflation has dipped to a five-year low. It's coming at 3.54 percent
00:23and that's compared to 5.08 percent that we had seen in the previous month. That's June.
00:29Now, there were several interesting takeaways from yesterday's data. One of them was the
00:35uptick we saw in core inflation. Now, according to Bloomberg, core inflation that excludes
00:42food and fuel, the volatile components of the basket, rose 3.37 percent and that was
00:49compared to 3.15 percent we'd seen in the previous month. This is the first time since
00:55September 2022 that we've seen a fairly significant uptick in core inflation after several months
01:02of consistent decline and the core inflation figures having touched a series low. Today
01:09I'm joined by Madan Sabnavis, Chief Economist at the Bank of Baroda and Radhika Pandey,
01:14Associate Professor at the National Institute of Public Finance and Policy to help us understand
01:21what are the implications of higher core inflation and how do they see this trend pan
01:27going forward. Madan and Radhika, thank you so much for taking time out for us.
01:32So, you know, to begin with, I'll start with you, Madan. So, tell me about how you see
01:42this trend panning out and is this – are you looking at it as a concern at all or is
01:48it just a healthy indicator of economic demand at this point, given that it is still below
01:544 percent? Actually, I would say it's a normal indicator
01:59because we had abnormal numbers in the range of around 3 percent. Historically, if you
02:05look at core inflation, that is from the time the index came through, it has actually averaged
02:10closer towards 5 percent. In fact, we look at it on a monthly basis, number of months
02:15in which core inflation was above 5 percent, it's been higher than in case you are comparing
02:20it with food inflation. Because I think core inflation is something which comes basically
02:25from the corporate sector, let's put it that way, if I have to just separate between food
02:29and the corporate sector. So, there are always a case of saying that input costs keep increasing
02:34regularly. There's a certain kind of a profit margin which has to be added and there's of
02:39course the demand side influence which also comes through.
02:42So, what we have seen now is the beginning of a particular spiral which we're going to
02:45come across where core inflation is going to move towards its normal rate which is in
02:52the region of 4 to 5 percent is what I believe. So, nothing is going to be really surprising.
02:57We should remember that a number of corporates have already announced saying that for the
03:01last two years, they have not increased their prices because of the fact that overall inflation
03:06was high. So, I think it's time for them to start increasing prices. At the same time,
03:10we've also seen about demand conditions also evolving, the so-called excess demand pushing
03:16up prices. We have seen it in the services sector, if you look at the recreation sector
03:20for that matter. So, we have seen prices increasing even on that score. So, I think it's a fairly
03:25healthy and normal trend to see this particular number moving up. And I think we've had a
03:31long phase where core inflation was lower and probably we got a lot of support from
03:37it given the fact that food inflation was very high in those months.
03:41Right. Okay. Radhika, I'll come to you now. Now, as Madan also said, this is not necessarily
03:48a point of concern because if anything, it is an indicator of healthy demand probably.
03:53But it does still make the MPC's job going ahead a little more challenging, right, just
03:59given that core has been providing comfort at a time when food inflation has remained
04:05elevated. And even assuming food inflation does ease in the coming months, once we see
04:12fresh produce into the markets, this is one… Yes, certainly. I think…
04:16Yeah, please. Yeah, yeah. That was my question. Please go on.
04:20Yeah, yeah. Certainly, I think it's a cause for concern for MPC because if we see the
04:25data for the last so many months, we were seeing that the core inflation was showing
04:30a declining tendency. And now, we have seen that there is a reversal of trend. If we look
04:39at a more disaggregate level, especially in the mobile charges, inflation in the mobile
04:44charges has increased from around 1% to almost 10%. So, this trend needs to be monitored.
04:52Of course, it is also an indication of improvement in demand and also a signal towards normalization
05:00of price pressure. But this is something that needs to be watched over the next couple of
05:05months because food inflation was a cause for concern. But now, we have another headwind which
05:12needs to be monitored. And certainly, it will… If it continues its upward trajectory, it will
05:20make the task of the Monetary Policy Committee a bit more challenging. There were these expectations
05:27that maybe in October, there could be a rate cut. I think all those expectations will be tempered
05:33down at the core inflation. But we need to see whether it's a one-off event or do we see a
05:39sustained improvement or elevation in the core inflation in the coming months.
05:44Okay. All right. Madan, coming back to you. So, what is your projection, firstly,
05:50of core inflation going forward? Like, I'm just trying to understand what the magnitude
05:55of the headwind can be going forward. And also, this time, like Radhika mentioned,
06:01one of the reasons we saw an uptick was telecom tariffs. That's broadly factored in now, right?
06:07We did see some other components rise as well. For instance, the miscellaneous category or personal
06:13care and effects. So, are these the categories which we see rise going forward as well?
06:21No, actually, the way it works, we are talking of inflation, which is the percentage change in
06:25prices. So, once we see the telecom prices going up in the month of, say, July, it's going to
06:31remain at that level for the remaining eight, nine months, which means that over the lower base,
06:36which we had last year, we will continue to see the telecom prices being higher.
06:40So, just to draw an analogy, saying that if you look at the food prices, for example,
06:44the prices of Toor Dal, for example, may not have gone up on a month-on-month basis.
06:48But because of the fact that we have moved from something like Rs. 140 a kilo to Rs. 200 a kilo,
06:53and now we are stagnant at Rs. 200 a kilo, the fact that my 200 is going to be compared with
06:57a lower number in the subsequent months will make sure that pulse inflation remains high.
07:02So, I think that is what we're going to see in terms of core inflation.
07:05Now, to my mind, we're going to move probably towards a region of around 4% by the end of the
07:10year. Again, I would say this would be a kind of a normal kind of a movement, which we're going to
07:14see. And as far as the MPC is concerned, I think they were drawing a lot of comfort so far by
07:21saying that, look, we should be, I mean, some members took the view that we need to cut the
07:26rate because food inflation was high and therefore we have nothing, our monetary policy cannot control
07:30food inflation. But today they'll have to now turn around and say that, look, okay,
07:34food inflation may be coming down, but we also have this other concept called core inflation,
07:38which is moving up, which is directly under the control of the Reserve Bank of India.
07:42So, that is something which to my mind could probably make the Monetary Policy Committee
07:47think a little more. And I think definitely the Governor has pointed out that there are no hurry
07:51to cut rates because growth is very much on target. So, they can be watchful of inflation
07:57and see whether if at all the inflation number comes down towards whichever level that we are
08:01looking at, whether it is going to be sustainable at that particular level before taking any
08:06different stance or looking at a rate cut. So, just to follow up on that quickly,
08:13so given by what you've said, it is fair to assume that at this point, while the RBI and
08:19the Monetary Policy Committee will take cognizance of rising core, at this stage,
08:24given the levels it is at and given the projections for going forward, it's still
08:29not something that will actively dissuade or persuade the MPC to take a call on the
08:34benchmark lending rate on the basis of that. Is that right?
08:39No, absolutely. Because what's going to happen now is that let's assume we have a good monsoon,
08:43good kharif crop, the high base effect on food products, you will have food inflation coming
08:48down. So, even though we will continue to pay high prices on vegetables, high prices on pulses,
08:52rice, wheat, but inflation per se is going to come down on the food basket side. On the other hand,
08:57when you are looking at core inflation, now core inflation doesn't have this 46% weight,
09:01which we're talking about the food products. This is something which is going to keep witnessing
09:05an increase. It's not going to be as prodigious as what we saw for food inflation, but it will
09:09definitely be moving towards a 4% mark, which means that the MPC members will have to be a bit
09:15more cautious, a bit more circumspect when they're passing judgments about the future direction of
09:21inflation. Because if you look at the RBI's forecast of inflation, they're talking 4.4%
09:26Q2, 4.7% Q3. Now, this composition of this 4.7% and Q3 will be curious,
09:33because food inflation in my mind will probably be moving downwards. But if core inflation starts
09:37moving towards a 4.5% range, then I think there will be an issue for the MPC in terms of deciding
09:44whether to change the stance or to even go in for a rate cut. All right. Radhika, one last question
09:50to you before we wrap up. Broadly, given the inflation and growth dynamics, is it fair to say
09:56that growth continues to remain fairly resilient? For instance, yesterday, along with CPI inflation
10:03data, we also got figures for industrial output. And is there a concern that a slightly lower
10:10industrial output would translate into lower manufacturing GVA for Q1 as well? We are
10:16expecting GDP figures for Q1 end of this month. What is the growth dynamic looking like?
10:25So, if we look at growth dynamics, purely looking at IIP, we see that, you know,
10:30there have been some signs of slackening in the IIP. For the first quarter, if we look,
10:36and if we saw for the month of June, IIP came in at 4.2%. And if we look at the composition,
10:44the manufacturing sector, which makes up for the bulk of IIP, it slowed down in June. And overall,
10:50also, the overall IIP is showing some slackness. So, if we go by IIP, and also coupled with the,
10:59you know, the corporate sector results, the early bird results that we have,
11:03we see that there has been some decline in moderation and profitability of companies.
11:10So, coupled together, these two facts that IIP has shown a weakness, and the major components,
11:17like the manufacturing sector, has shown a weakness. And from the use-based classification,
11:22it's the consumer goods sector, consumer durables and non-durables, that have witnessed a decline
11:29in growth. Coupled with the weakness in corporate sector profitability, which, you know, we expect
11:36that the manufacturing sector GVA could show some weakness in the first quarter. So, that is
11:42just from the manufacturing sector side. Of course, there are other sectors to watch out for.
11:47But if we look at these two indicators, we can get some sense about manufacturing sector
11:51performance, that, you know, there could be some slackness owing to the lower IIP and the,
11:58you know, weakness in the corporate sector profitability due to cost pressures rising.
12:03All right. Thanks a lot, Radhika and Madan, for joining in. With that, we're completely
12:08out of time, but this was most informative. We appreciate both of you taking time out for us.
12:14Thank you for watching NDTV Profits. Stay tuned, we have more coming up.