RBI will have to look through high inflation for growth, say economists

High inflation print is the price that the Reserve Bank of India (RBI) will have to pay to nurse a fragile growth back, say economists. Wholesale Price Index-based inflation rose to a record high of 12.94 per cent in May, aided by low base effect, but also because of higher fuel and commodity prices. Retail inflation, too, surprised by rising to 6.30 per cent, while the core inflation, which is the non-food and non-fuel component, rose to an 83-month high of 6.55 per cent.

These numbers are much above RBI’s upper limit of 6 per cent inflation target, but there is very little that the RBI can do at this moment. The central bank would rather hope that an urgent reduction of taxes by the government brings down prices in the interim.

A rough estimate suggests that every 10 per cent rise in fuel prices in pumps contributes to 50 basis points rise in the headline inflation – 20 basis points as direct impact and 30 bps through logistics and other indirect means. This can be controlled by lowering taxes for now.

Source: Business Standard