Will inflation’s trajectory last? – Hindustan Times

The only question worth asking at the moment is whether this trajectory will last.

Let us take inflation first. The biggest X-factor at the moment, as the Monetary Policy Committee’s (MPC) resolution points out, is food prices. They have played a big role in bringing the headline number down and could drive it up once again if the south-western monsoon is not normal, a possibility which cannot be ruled out at the moment. The fact that cereal inflation continues to remain high only underlines this point. MPC will have more clarity on this question when it meets in August.

What about growth? So far, the government’s capex push has played an important role in supporting growth. But the March quarter’s GDP data and the April IIP numbers show that private consumption continues to remain weak. Second round effects of interest rate hikes in the last year will likely generate additional headwinds for private consumption and investment. Given the unanimity around the fact that rate cuts are only a matter of when rather than whether, a prolonged pause could lead to some borrowing being postponed. To be sure, most of these eventualities are likely to have been incorporated in RBI’s growth forecasts, which has been kept unchanged at 6.5% for the fiscal year 2023-24. Of course, a major disappointment on the monsoon front could spell trouble for rural incomes and demand.

The only factor which is missing from this kind of an analysis is the possibility of a political pivot in fiscal policy. What if the government were to announce a cut in fuel prices or announce a large fiscal intervention to mitigate the impact of a weak monsoon? Fiscal policy is more likely to spring a surprise in the run-up to 2024.