Davos 2023: Strong core inflation to remain area of concern for RBI, says Raghuram Rajan

“We should be prepared to potentially go back to low inflation regime,” Raghuram Rajan said

Former Governor of the Reserve Bank of India (RBI) Raghuram Rajan has warned that a persistently high core inflation will likely remain an area of concern for the Indian central bank in its fight against inflation in the approaching days. Core inflation refers to non-food, non-oil part of the overall inflation.

"The area of concern the RBI also has is really when you look at core inflation, which is quite still strong," Rajan said while speaking to Moneycontrol at Davos 2023.

India’s core inflation remained sticky above 6 percent and elevated despite the headline inflation falling for two consecutive months in November and December.

Core inflation remained above the upper tolerance band of the RBI.

In the December policy review, the RBI governor Shaktikanta Das  too had warned about core inflation saying this has remained sticky and elevated.

"The issue on inflation side is disinflation because food prices have come down and that typically what happens in winter," Rajan said.

India's headline retail inflation rate eased to a one-year low of 5.72 percent in December from 5.88 percent in November.

With the fall in December, CPI inflation has fallen for third straight month. It is also the second month in a row that it has come in lower than the upper bound of the Reserve Bank of India's (RBI) 2-6 percent mandate.

As for the medium-term target of 4 percent, CPI inflation has now exceeded it for 39 months in a row.

The fall in inflation was attributed to the easing food and commodity prices.

Rajan further said that the big issue across the world is that the commodity prices have been coming down in the wake of lockdown in China and if Chinese economy picks up then European countries will start having a problem.

“The commodities like oil, natural gas, as China starts buying more liquid gas the European will start having a problem as they are also in much liquid natural gas market because they are not getting pipeline flows from the Russia,” he said.

He further said that if commodity prices started going up then India will have problems of external deficit and inflation again going up. “We already have a high current account deficit,” Rajan said.

Indian central bank has hiked the key repo rate by 225 basis points since May, 2022 to fight inflation.