Sticky inflation to persist for few months: Shankar Acharya

Dr Shankar Acharya of ICRIER says he wouldn’t lay much emphasis on the recent WPI inflation numbers. Government data shows India’s consumer price inflation rose in April to 10.36%.

Consumer price-based food inflation accelerated to 10.18% in April from 8.22% in February, driven by a rise in prices of vegetables, eggs and fish products.
As of now, he sees the core component of the WPI basket remaining pretty good. But the key worry across the market is the rupee and its movements. Also Read: CPI number reflecting rise in food inflation: Nomura
If it persists at current levels or if it indeed goes lower vis-à-vis dollar and other currencies, then you can expect an additional bit of inflationary pressure. “From that point of view, I would agree with your term that inflation is likely to be sticky in the coming weeks and months in India,” adds Acharya. Below is an edited transcript of his interview on CNBC-TV18. Watch the accompanying video for more. Q: Were you surprised by the high inflation number that came in? Do you think inflation will be stickier for longer than most people have thought so far?
A: I do not think we should overdo this figure that’s come in, in the last few days because it’s only a small uptick as I see it. The core component of the WPI basket remains pretty good. It’s not doing anything especially worrying. In itself, I am not concerned. This comes against a background where the Reserve Bank of India (RBI) in its April guidance of its monetary policy pointed to concerns regarding potential inflation when base effects wear off and possible pass-through on oil prices and so forth. So that was already there.
The new factor that has come into some extent in the last few weeks is the rupee’s movements and that will be something which if it persists at current levels that we see in the market place or if it indeed goes lower vis-à-vis dollar and other currencies, then you can expect an additional bit of inflationary consequence of that as it feeds through the whole import of goods and services basket etc. From that point of view, I would agree with your term that inflation is likely to be sticky in the coming weeks and months in India. Q: On the rupee, what other targeted action do you expect the reserve bank to take? We saw some of it last week but this week has been more about fighting it on a day to day basis?
A: It is always easier to manage market intervention by the bank or for that matter any other central bank, when you are trying to moderate sharp increases in appreciation which of course this RBI did not do back in 2009-10 when it could have.
To some extent, that is part of the problem what we are seeing today. But when you are trying to put the brakes on sharp declines in the currency values, it is not a science but an art. In one sense, it is good to allow the rupee to find a level where it can be supported and sustained rather than try and shore it up at an unrealistic level. On the other hand, there is always the risk of over shooting that these kinds of corrections do tend to be associated with. I have all sympathies with those who are at the operational desks of the RBI of essentially trying to choose the moments and the kind of intervention that they want to do.
This is in the context of probably a general strategy or tactic where what they are trying to do is put some brakes on the rupee but without trying to go against its underlying sustainable level. That is much more determined by what has been going on in larger macro economic policy issues such as the fiscal situation, the current account deficit, global worries etc. I think that is what is at play. Q: Do you think we will manage to finally achieve the kind of growth targets because global growth seems like its slackening more than what one anticipated and our own IIP numbers are not indicating any recovery or pickup in the investment cycle. Given these twin pressures, do you think there is a risk to growth estimates for the year?
A: I do not know what the consensus growth estimate is. My own one for few weeks at least and perhaps few months has been that in this fiscal year, the one we started six weeks ago is likely to be in the range of 6-7% perhaps a little closer to 7 than to 6% but its too hard to tell. I guess I have a slightly more bearish view of the range or of the possibilities in the coming year and therefore perhaps I will be less surprised. Q: We have not seen any meaningful pass down in oil prices but crude has corrected quite a bit over the last few days. Do you think one should be slightly more sanguine about the current account deficit figure now or because of global risk off environment it still remains a risk?
A: I think that certainly helps and the risk-off works cuts both ways. One, it’s associated with the decline in commodity prices because people get more worried about what is going on in Europe and perhaps now China to some extent because there it is a completely different order. To some extent, the view that world growth is going to be slower than perhaps what the view was six months ago in-turn suggests that commodity prices including oil will be weaker than it would have been.
That is something which clearly helps countries like India in terms of managing our current account deficits but as against that if risk is still an issue vis-à-vis emerging markets and that is still very much the case, then its harder to fund whatever level of current account deficit we do have. So this heightened risk does have its problems from that dimension.