Core Inflation can Muddle the case for Rate cuts

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The expectations of a policy rate cut in August are getting firmer every day in the market, especially after the latest reading of retail inflation for May. A rather dovish tone of the minutes of the monetary policy committee (MPC) meeting seems to have added more fuel to these expectations.

But a critical element and perhaps a constant bugbear for the Reserve Bank of India (RBI) has been core inflation. And here, the MPC members differ in their judgement of the future path of inflation.

Members like Ravindra Dholakia and Pami Dua believe the deceleration in core inflation is durable, while RBI governor Urjit Patel, member Chetan Ghate and deputy governor Viral Acharya sound unsure of a sustained deceleration. Michael Patra suggests that core inflation is still worryingly sticky.

While the truth could be somewhere in-between the most dovish (Dholakia) and the most hawkish (Patra) comments, it pays to see how core inflation has moved. It gets more complicated as for all the jawboning by RBI on core inflation, the central bank has not precisely defined the core inflation it monitors. From past statements, it is assumed that RBI arrives at core inflation after stripping food and fuel from the headline number. This has dropped to 4.14% in May from 4.44% in April and 4.5% a year ago.

Economists, of course, have a different take and argue that core inflation should also exclude petrol and diesel elements as well as precious metals like gold and silver. This “core core inflation” is what economists want the central bank to track.

Core core inflation has dropped to 4.01% from 4.18% in April and 4.87% a year ago. Indeed, the fall in this indicator is sharper than the core inflation that RBI is assumed to monitor