Uptick in WPI means economy is on the mend: Mythili Bhusnurmath, ET Now

In a chat with ET Now, Mythili Bhusnurmath, Consulting Editor, ET NOW, says this is a far better situation than we had earlier when we saw the CPI move up or not fall significantly. We saw the WPI contract very sharply. The big divergence made policy making difficult. Edited excerpts



ET Now: Does the June WPI numbers indicate that now we are in an upward trending inflationary environment because the CPI number was also slightly higher at 5.7 per cent. Does it look like the beginning of a trend in pick up and bounce back in inflation in prices in general?
Mythili Bhusnurmath: Yes. It certainly suggests that inflation is again on the uptick but as long as it remains within the RBI’s target of 5-5.5 per cent range for January 2017, which it has currently exceeded at 5.7 per cent. Talking about the average, I would not worry too much because prices of food articles have gone up but that is hardly because of fruits and vegetables.

They are very seasonal and as we see in Mumbai, part of the problem was also because of the issues regarding the AT&C and the state governments move to move fruits and vegetables out of the mandate of the mandis and led to a lot of mandis going on strike. The middleman went on strike, resulting in sky rocketing prices of fruits and vegetables in Mumbai. This is going to impact the CPI may be next month. So we are definitely in a territory where we are going to see inflation inch up. As long as it remains I would say within 5-5.5 per cent for the year as a whole, we do not have too much to worry because food prices tend to be seasonal my only worry is that as far as the WPI numbers are concerned, the slight unhappiness over here despite the increase in to 1.2 per cent is that inflation has not picked up significantly. Most of the increase comes from primary goods. So I would say the numbers are better than before to the extent that they are no longer contracting but certainly this does suggest that inflation is on the uptick. As long as the uptick is not too much, I would not worry too much. It does suggest that the economy seems to be on the mend.

ET Now: The only thing is you would want disinflation to be on the uptick. At 1.62 per cent, it is not an alarming level at all.
Mythili Bhusnurmath: If you remember, in September 2015, the difference between the CPI and the WPI had reached as much as 9 per cent. Now when you have that kind of a difference, it becomes very difficult for any central bank regardless of whether it is focusing on CPI or WPI to take a policy decisions on inflation target. What do you target when the difference is so much? The difference seen in the CPI and WPI is narrowing and that makes it much easier for the monetary authority to take a call. So to that extent, I would certainly think this is a far better situation than we had earlier when we saw the CPI move up or not fall significantly. We saw the WPI contract very sharply. The big divergence made policy making difficult.

ET Now: The only thing I am thinking right now is what does this do for monetary policy direction, I mean all these data points we are going to be looking at. The MPC will be formed very soon. The new RBI Governor will be announced. Some of the names that are doing the rounds have rather a very dovish bent in terms of their ideology. What do you expect from the next RBI Governor in terms of just a line of thought that he or she needs to take going forward and to handle this situation?
Mythili Bhusnurmath: For the sake of the country I hope decisions are not taken on the basis of ideology. I know there has been a lot of talk about dovish ideology but that will be catastrophic. Decisions particularly on something as typical as monetary policy must be taken on the basis of data and of course some understanding of the broader Indian economy and the implications.

As far as the data that we have got, there is no case whatsoever for a cut in interest rate at the moment. Particularly given the fact that we have huge uncertainty on the FCNR redemptions, we have inflation inching up -- both CPI and WPI and IIP are not doing so badly. In fact, if at all, it is improved. So certainly I would think that the August monetary policy should call for status quo and not be driven by anything, least of all a dovish outlook that would not be a help to the economy at all because inflation is a far bigger problem in a country which has such a large section of its population below the poverty line 30% odd is not a small number and particularly because food inflation is inching up I would think that August monetary policy should call for status quo.