Inflation is being fuelled by hardening crude prices, magnified in retail prices of petro-fuels by cascading fuel taxes, besides supply bottlenecks arising from assorted regional lockdowns on account of the pandemic.
The spurt in inflation — the consumer price index (CPI) has shot up to 6.3% in May, a six-month high, while the wholesale price index (WPI) rose 12.9% — might seem alarming, but does not arise from any excess demand pressures and calls for neither monetary nor fiscal tightening. Inflation is being fuelled by hardening crude prices, magnified in retail prices of petro-fuels by cascading fuel taxes, besides supply bottlenecks arising from assorted regional lockdowns on account of the pandemic. Inflation is quite likely to be only a temporary phenomenon, as the logistical bottlenecks are eased and lockdown restrictions relaxed nationally.
And the monetary authority, Reserve Bank of India (RBI), would need to continue with its flexible inflation-targeting monetary policy — as it has lately — and simply ignore the recent price spiral. Notice that such high-frequency indicators as electricity generation, railway freight traffic, port cargo, steel consumption, cement production and toll collections did notch sequential moderation during April-May, after imposition of the interim lockdown restrictions across states. The gradual reopening and resumption of near-normal economic activity would doubtless improve logistics and augment supply so as to moderate inflation. The pandemic has crimped growth and capital formation, and the economy needs accommodative monetary policy. RBI needs to keep its key policy rate low, so as to purposefully indicate lower cost of funds economy-wide. Note that the manufacturing Purchasing Managers’ Index (PMI) slid from 55.5 in April to 50.8 in May following the second-wave Covid lockdowns.
However, given the rising trajectory of global commodity prices, especially of crude, RBI expects upside risks in its inflation outlook. Further, comfortable cereal buffer stocks and the recent supply-side interventions in pulses should ameliorate tightness in food prices. India should join other countries to persuade the oil cartel Opec to increase production and not choke global growth with elevated supply costs.