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India Needs To Remain Watchful Of Supply-Side Inflation: HSBC Chief India Economist

“The MPC is best served by not tinkering with rates in the Friday meeting,” Pranjul Bhandari said.

Customers transport vegetables from the Ghazipur Wholesale Fruit and Vegetable Market in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
Customers transport vegetables from the Ghazipur Wholesale Fruit and Vegetable Market in New Delhi, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

Indian policymakers need to keep a ‘watchful eye’ on food and supply-driven inflation, according to HSBC’s Pranjul Bhandari, who expects the Covid-19-related supply disruptions to last longer than expected.

The dominant narrative is “there are some supply-side disruptions that will ease and inflation will come off”, the chief India economist at the research firm told BloombergQuint’s Ira Dugal in an interview. A closer look at the details, however, makes her “nervous”. “I don’t see any room to cut rates right now.”

Around half of India’s economy comprises informal businesses, which do not have a financial buffer. The prolonged lockdown has put a lot of these firms — that mostly produce necessities such as food or textile — out of business. That is the largest cause of the supply-side disruption seen across the country, Bhandari said.

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“During demonetisation, many of them [businesses] died but they also came back quickly after that. This time my worry is that the disruption has been far graver,” she said, cautioning that the time taken between the death and birth of these businesses will be marked by high inflation.

This comes at a time retail inflation in India as measured by the Consumer Price Index remained above the Monetary Policy Committee’s target of 4 (+/-2)% for the fifth straight month. CPI inflation stood at 6.69% in August compared with a revised estimate of 6.73% in July. Inflation in the food and beverages category rose to 8.29% in August, led by higher prices of pulses, meat and fish. Wholesale inflation, too, inched up for the first time since March. The latest figures are yet to be released.

The Reserve Bank of India governor-led MPC is set to meet for the first time after the appointment of three new members. The committee kept the benchmark repo rate unchanged at 4% in its last bi-monthly policy and is largely expected to do so again. Since March, the MPC has cut rates by 115 basis points to counter the impact of the pandemic.

“The MPC is best served by not tinkering with rates in the Friday meeting,” Bhandari said.

Watch the full conversation here: