High inflation leaves RBI with no room for rate cut: PMEAC

The Reserve Bank of India may not have much room to lower rates if inflation stays high, said Prime Minister's Economy Advisory Council (PMEAC) head C Rangarajan.

Consumer inflation for November climbed to 11.24 percent, compared to 10.1 percent in October. This has increased the probability of the RBI raising the benchmark repo rate at its policy review meet next week.

On Wednesday, Finance Minister P Chidambaram said monetary policy was a blunt tool in fighting inflation, meaning that keeping interest rates high would not solve the problem of inflation, and at the same time, would damage growth.

But economists feel the RBI may decide to hike rates considering that taming inflation is its priority at the moment.

Congress party leader Sonia Gandhi admitted that rising prices was the key reason for her party's miserable showing in the state polls.

Rangarajan said October saw an extraordinary increase in vegetable prices and that inflation could ease in December if onion prices declined. He also expected prices of key commodities to soften in January.

On industrial output, Rangarajan said the October number (minus 1.8 percent) was disappointing, but it should pick up in the coming months.

Below is the verbatim transcript of Dr Rangarajan's interview on CNBC-TV18

Q: November consumer price index (CPI) at 11.24 percent looks like a runaway inflation. What tools are there? Does monetary policy have any other choice but to hike rates?

A: The inflation rate as revealed by the CPI numbers is very high. This is triggered once again by food inflation. It was in the month of October that we saw the extraordinary increase in the prices of vegetables following in the month of November and that is what is getting reflected now. As we go ahead, all indications are that the vegetable prices are coming down very sharply. Even onion prices have fallen sharply and therefore, December numbers may give some cheer.

Q: The non-food non-fuel inflation or core CPI is up 8.94 percent which had slid from 8.4-8.1 percent in the month of October. Isn't this a generalised inflation?
A: If food inflation persists long enough then it gets generalised. It works through the higher demand for wages and many other things. The core CPI inflation essentially comprises of services and manufacturing. Services prices are very closely related to food prices as well.
When food prices are rising and are remaining at a high level for an extended period then the prices of services also go up. Therefore, the core in CPI is somewhat different from the core in wholesale price index (WPI). The core in WPI is purely manufacturing whereas the core in CPI includes services. Q: Would you say that even a 0.25 percent rate hike is not enough?
A: I do not know how exactly the monetary authorities would react but we need to wait for the WPI numbers which will come in the next few days. Certainly, the room for monetary authorities is very limited in the light of this very high inflation. Q: How do you expect CPI to move? By March 2014, where do you expect CPI to possibly trend? Will it still be double digits?
A: I do not think it will be in double digits. The numbers indicate that the big push is coming from vegetables, fruits and so on. There are already indications in the market that these prices will come down in December.
Infact it is expected that in January, the prices of some of these commodities such as onion will go down. Therefore, I do not expect food inflation to remain at that level. By March, it could come down in the region of 7-8 percent. Q: April to October industrial output is zilch. Last month itself is a contraction of 1.8 percent. Now with a situation where the monetary authority cannot ease and will have to in fact step up a bit more, do you think that even 5 percent could be under question for the full year in terms of GDP growth?
A: The calculations that we have made while computing the expected growth rate for the year, one had assumed a growth rate of only about 1 percent or 1.2 percent as far as manufacturing is concerned. That would mean something like 2.4 percent in the second half of the year, because in the first half it is practically zero.
The possibility of industrial production rising in November and December is clearly there, because in October you had the additional problem that the industrial production rose sharply last year from September to October. If you rule that out, it may not look this bad. Therefore, I still expect that it is possible for the industrial production to pick up in the month of November-December and into the first quarter and so, 5 percent growth rate is still possible.