Mint Primer: How inflation dynamics have changed since last MPC meet

livemint.com:

The Reserve Bank of India's monetary policy committee (MPC) is set to deliver its decision on policy repo rate on Friday, with the market broadly expecting a status quo despite the recent surge in inflation amid the hardening of bond yields. The rate pause, nevertheless, would be a complex challenge for the MPC this time. Mint explains why: The MPC is expected to keep the repo rate unchanged at 6.50% for the fourth consecutive time in October as core inflation, which excludes food and fuel and light groups, has been below the Reserve Bank of India’s (RBI’s) upper tolerance limit of 6% for six consecutive months, offering some respite from high food prices.

The MPC was hawkish in its tone at the August meeting, saying it would “maintain a close vigil on the evolving inflation scenario". While inflation has surprised on the upside in the recent months, mainly on account of volatile vegetable prices, softening of core inflation at the same time and steady economic activity may not warrant any action in the ongoing meeting. But the RBI can’t ignore the changed inflation situation and outlook, and this will make the status quo more complex than it looks.

Since the last meeting, inflation for July and August has been 7.44% and 6.83%, respectively, with the sharp jump since June (4.87%) coming from vegetable inflation, which has averaged 31.8% in these two months. While vegetable prices have corrected somewhat, cereal and pulses prices continue to rise. More worryingly, the recent surge in crude oil prices from around $85 per barrel in early August to $95 currently could play an important role in setting the tone.