Headline number has declined, but battle against inflation not over: Jahangir Aziz, JPMorgan

While food inflation may soon enter double digits, core inflation remains the bigger headache for RBI, says Jahangir Aziz, Chief Economist for India, JPMorgan. Excerpts from an interview with ET Now:

ET Now: What is your reaction on the inflation numbers?

Jahangir Aziz: That the headline inflation at least has come down much lower than expected is a very positive sign. The core inflation actually fell much more sharply. One has to understand why the inflation came down and whether it was just a one-off event.

But this should not be a signal for the government to say the battle against the inflation is over and, therefore, push the RBI to start cutting rates and easing monetary policy.

ET Now: But with the monsoon still looking weak, could food inflation enter the double-digit domain?

Jahangir Aziz: Yes, food inflation will very likely hit double digits. But the real concern is -- what part did core inflation play in today’s 6.8 inflation number? An actual fall in core inflation signals that the economy has weakened to a point where it is significantly slowing.

At present, the RBI will be far more worried about what really happened to core inflation than food inflation. I have not seen core inflation numbers, but an actual decline in core inflation signals that excess capacity is building up in this economy.

ET Now: Manufactured goods inflation is 5.58% against 5% earlier. Would you say that is bad news which alone can possibly make the RBI hold back?

Jahangir Aziz: Yes, because that basically says that as far as the non-agriculture part of the economy is concerned, where the Reserve Bank can actually influence the monetary policy, things have not really changed much.

Therefore, the 6.8 number is likely to have been caused by one-off events of either the pass through of the declined in commodity prices or the slight appreciation of the currency that we saw that month.

Therefore, these one-off events, the fact that food inflation is likely to build up in the rest of the quarter and the fact that core inflation has not really come down would tie RBI’s hands pretty much.

The RBI would have been much happier had that 5.5% actually been 4.5% and if food inflation was 10% or 15%.