PRICES RISE 6 PERCENT, IIP, FOREX CONTRACT

A smart Reserve Bank of India anticipating prices shooting up has decided not to tinker with the interest rates. It’s just not food prices but overall many commodity prices have risen in September to over 5 percent, according to Consumer Price Index (CPI) and trends suggest the festival season has become pricier.

The RBI “neutral” stand, as it announced after the October 7-8 Monetary Policy Committee (MPC) meeting, is extremely cautious approach of the RBI 6Governor Shaktikant Das, who still feels that inflation above 4 percent dips the country into uncertain zone. Its evident with the drop in industrial production, rise in rupee rates and fall in forex reserves discomfort rises.

India’s benchmark inflation as per CPI was above 6 percent, a tad too high, according to MPC. The Bloomberg estimated the CPIbased inflation to rise to 5.1 percent in September. This is after it came in at 3.65 percent rise in August and 3.54 percent in July, when it was lower than the RBI’s target of 4 percent. The RBI indicates the range 4 to 6 percent, is set higher than its tolerance limit.

It has thawed the interest rate rise for watching the US election results. The US inflation is rising and impacting globally with escalating conflict situations in the Western Asia and Russia-Ukraine. If it does not change after the US polls, the December MPC poll may take a different stand.

The newly-appointed independent MPC member Nagesh Kumar, who has worked with international organisations, is aware of the corporate moves. Seemingly to accede to the corporate needs, his only dissent note wants rates to be cut even as international and domestic corporate profits zoom.

The RBI cannot control the global situation. Nor it can blindly follow the US Fed Reserve recent move to cut rate cuts by 50 basis points or 0.5 percent. It was a political decision in the wake of the US presidential election on November 5. The elections are between corporate groups which influences decision makers for cheaper credits. The Indian corporate also have been lobbying for rate cuts.

Even during 2009, the RBI took the decision to increase rates and continued to do it for many quarters to counter galloping inflationary situation.

The market situation remains grim now as is evident from the stock market upheavals, consumer demand and industrial situation.

The rupee has dipped sharply against dollar during the last four months. It weakened from Rs 80 to 83 in earlier two months and during the last two months it has further come down from 83 to 84.07. This is against the anticipation that the US Fed rate cuts would weaken dollar and strengthen the rupee.

Other Asian currencies, except rupee, have appreciated over 5 percent during the past two months.

The RBI may allow to rupee to veer around 84.2 to 84.35 (maybe a bit more) and on the higher side 83.7 – 83.8 range.

The rising crude rates and foreign portfolio investors (FPI) outflows have put downward pressure on the economic situation. The situation paves way for active intervention by the RBI to check volatility. So, interest rate rise in December is not out of place but for the elections in Jharkhand and Maharashtra.

The Brent crude has risen to $ 78.92 per barrel in October against $ 69 in September. This is likely to spurt petroleum prices and add further to the inflationary situation. Import prices could go up in the wake of Israel-West Asian countries flare-up. By Diwali, the prices could go up further and may suppress demand.

India’s forex reserves dropped by $ 3.709 billion to $ 701.176 billion for the week ended October 4, the RBI said on Friday. In the previous reporting week, the reserves had jumped by $ 12.588 billion to an all-time high of USD 704.885 billion.

The situations reveal a surge in prices. Medicine prices are being surreptitiously raised. During the past few weeks, a number of ophthalmic drops and other medicine prices have increased. The companies have played truant. They have maintained the price tag per eye drop bottle while the size halved from 20 millilitre (ml) to 10 ml.

Meanwhile, the RBI is watching the rise in grocery bills as the FMCG companies are hiking rates of household essentials like cooking oils, soaps and detergent due to higher prices of commodities used for production, like palm oil or copra. Consumer companies are saying in the September quarter their earnings
lowered due to increase in palm oil prices since March. Similarly, mustard oil, other edible oils, and coconut oil products are becoming costlier.

Even loaves of breads now having higher prices are likely to upset household budget.

Besides, the recent import duty hike also led to vegetable oil prices moving higher. The operating profits of companies reduced. The inflation could be the biggest risk for the companies but as their product demand is high, they would not go bust. They would make up the projected losses by increasing prices or by reducing the grammage of packings. This is in sync with the RBI MPC caution that unexpected weather events (rains, drought or hurricanes). Worsening geopolitical conflicts (which can impact global commodity prices) and recent increases in prices of edible oils, wheat, and key vegetables posing upside risks to the inflation outlook. Vegetable and overall food prices remain out of control during the past many weeks. The cost of tea is also being gradually raised by companies.

It is expected that inflation of all commodities could spur as more nations are engulfed in the Israel- Iran conflict.

Reflecting lower purchasing power capacity, may be due to large unemployment (9 percent in June, says CMIE), less hike in wages, more casualisation of work and contraction of industrial output for the first time in two years. The National Statistical Office figures show industrial index (IIP) contracts 0.1 percent in August against 4.7 percent rise in July 10.9 percent growth in August 2023. The manufacturing grew an
anaemic 1 percent against 10 percent in August 2023. The mining sector rises 4.3 percent (12.3 percent in 2023) and the electric sector fell 3.7 percent (15.3 percent Aug, 2023). The core sector comprising 40 percent of IIP, contracted by 1.8 percent.

The headline growth has been retained by the latest MPC at 7.2 percent. But the difficult price situation can change the future projection. Higher inflation means, the country would be striving to reset its path as job and wage situations could become critical.

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