Inflation falling but government remains watchful, says source

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The government continues to keep a close watch on domestic price developments even as the headline retail inflation rate has come off from its peak and other aspects of the economy have taken centre stage, a senior official said on August 11.

"We monitor many aspects of the economy at the same time. But sometimes, the spurt in one aspect is very aggravated and it becomes a prominent challenge," the official said on the condition of anonymity.

"The measures the government and the Reserve Bank of India (RBI) have taken have helped in lowering inflation, but it's not like it has stopped being a concern. It's just not as worrying as it was a few months ago," the official added.

Consumer Price Index (CPI) inflation has fallen from 7.79 percent in April to 7.01 percent in June, with data scheduled to be released on August 12 expected to show it may have fallen further to 6.7 percent in July, as per a Moneycontrol poll.

However, inflation remains well above the RBI's medium-term target of 4 percent and the 6 percent upper bound of the central bank's tolerance range. In fact, the expected inflation number for July would be the 34th consecutive month CPI inflation would have come above 4 percent and the seventh straight month over 6 percent.

The official argued India is relatively better placed than other countries when it comes to inflation, with the US and UK experiencing inflation levels that are the highest in 40 years.

"We are looking at every angle when it comes to inflation, be it edible oils for the common man or steel for houses," the official said.

While inflation has been declining, it is not expected to fall rapidly enough for the RBI to avoid failure.

The RBI is deemed to have failed when average CPI inflation is outside the 2-6 percent tolerance band for three consecutive quarters. So far, inflation has averaged 6.3 percent in January-March and 7.3 percent in April-June. As such, if inflation in July-September matches the RBI's forecast of 7.1 percent, the central bank would have failed in meeting its mandate. In such a scenario, the RBI must submit a report to the government—commonly referred to as 'the letter'—spelling out the reasons for failure, the remedial actions it proposes to take, and an estimate of the time period within which inflation will return to target.

When asked if the government would make public the report the RBI to the Centre after it fails to meet the inflation mandate, the source said "let it (report) come" first.