NEW DELHI: RBI governor Raghuram Rajan has taken a bold gamble betting on a possible softening of food inflation to help him avert a rate hike for now and support slowing growth. Fresh arrival of crops may ease the pressure on food inflation and already there are signs of a downward trend in vegetable prices. But the government will have to continue efforts to improve supplies and any complacency on this issue will witness price pressures strengthening again. This is tougher than it sounds. The likelihood of populist measures in the run-up to the national polls may again strengthen price pressures.
The impact of the US Federal Reserve winding down its stimulus is also a crucial factor which would impact the price situation despite the government asserting that the country is better prepared now to face the situation. With the 2014 general elections, the government – which is battling voter anger over high prices – may have to demonstrate that it is taking steps to tame inflation. The ball once again is in its court. The move to defer an interest rate hike for now provides the government enough space to act decisively on improving supplies and dealing effectively with the fiscal situation. The governor, who had raised interest rates twice since taking over in September, has not led his guard down on price pressures, highlighting the dangers that still exist and has said these may prompt the central bank to act if they tend to gather momentum in the weeks ahead.
“He (Raghuram Rajan) is expressing confidence that price inflation will come under control and let’s hope that he is right. If he is right, then definitely in retrospect it will be proved to be a very good decision,” Planning Commission deputy chairman Montek Singh Ahluwalia said. But some economists say that the RBI may have to act sooner than later. “While we do not disagree that food inflation is likely to ease going forward, on the back of a gradual normalization of supply, we are not convinced that headline inflation will drop very much as overall food inflation may not decline notably,” said Leif Esekesen, chief economist for India and Asean at HSBC. “Moreover, there still is a need to potentially raise diesel prices to contain the fiscal deficit, and inflation expectations are not on the verge of turning in the near term either.” Economists say that inflation risks still remain tilted to the upside.