Since February 2023, the RBI has incrementally raised its policy rate to 6.5 per cent, followed by a prolonged pause, aiming to stabilize inflationary pressures. The thali, it is expected, will hold back the RBI’s hand this time too. High food prices have halted the overall disinflation.
As per an ET poll of 12 experts, the RBI is likely to keep interest rates unchanged this week as high food prices prevent any tilt toward softer policy, but easing core inflation and a global turn toward lower borrowing costs could make a case for the central bank to shift to a neutral stance in the next quarter. The MPC’s target for headline CPI inflation is 4%. The price gauge, however, has remained above that mark for 57 months in a row, initially due to supply-side disruptions caused by the pandemic and the Russia-Ukraine war and now the persistently high food prices.
Why inflation has become a food for thought
Since February 2023, the RBI has incrementally raised its policy rate to 6.5 per cent, followed by a prolonged pause, aiming to stabilize inflationary pressures. This measured approach initially showed promising results, with headline Consumer Price Index (CPI) inflation briefly dipping within acceptable limits from September 2023 onwards. The RBI said in its latest bulletin that despite the overall positive trajectory, inflation remains a key concern for the Indian economy as the uptick in June 2024 has derailed its disinflation path.”Yet, disinflation has been grudging and uneven and headline inflation remains closer to 5 per cent than to the target of 4 per cent in its latest readings in spite of historically low readings on core inflation and sustained deflation in fuel prices,” the RBI said . Food prices, which constitute well over half of the consumer price index, are to be blamed for this.
In June, food inflation surged significantly, lifting the overall Consumer Price Index (CPI) inflation to 5.1 per cent, up from 4.8 per cent in May. The increase in food prices, particularly vegetables, cereals, milk, and fruits, has been a significant contributor to this uptick. Despite a supportive base effect from last year, food inflation soared to 9.4 per cent, driven primarily by the persistent high prices of vegetables, which have remained in double digits for eight months.
Vegetable inflation remains a major concern, reaching 29.3 per cent in June, up from 27.4 per cent in May. The increase was broad-based, affecting both TOP (tomatoes, onions, potatoes) and non-TOP vegetables. TOP inflation surged to 48.4 per cent, led by onions (58.5 per cent vs. 38.1 per cent) and potatoes (57.6 per cent vs. 55.3 per cent).
Despite an on-month uptick in prices, tomato inflation eased to 26.4 per cent from 41.3 per cent, owing to the high base of last year. Non-TOP vegetables saw inflation harden to 19.7 per cent from 18.8 per cent, driven by leafy vegetables, brinjal, lady’s finger, and pumpkin. Foodgrain inflation remained rigid at 10.2 per cent, though slightly lower than the previous month. Cereals inflation inched up to 8.8 per cent from 8.7 per cent, mainly due to non-PDS wheat (6.7 per cent vs. 6.5 per cent).
Govt’s struggle with the thali
The government has been doing most it can to keep food prices low, from selling veggies and pulses at low rates to imposing stock limits and export curbs.
The government has to maintain a fine balance between protecting the interests of the farmers by not bringing prices too low as well as of the consumers, especially the poor, by not letting prices shoot up too high.
The government currently tracks the daily prices of 22 essential food commodities from 550 centers across 34 states and Union Territories: rice, wheat, atta, gram dal, tur (Arhar) dal, urad dal, moong dal, masur dal, sugar, gur, groundnut oil, mustard oil, vanaspati, sunflower oil, soya oil, palm oil, tea, milk, potato, onion, tomato, and salt. It will now begin monitoring daily wholesale and retail prices of 16 more essential food commodities to help stabilise rates through policy interventions. The newly added commodities include bajra (whole), jowar (whole), ragi (whole), suji (wheat), maida (wheat), besan, ghee, butter (pasteurised), brinjal, egg, black pepper, coriander, cumin seed, red chillies, turmeric powder, and banana.
The change in the list of food items to be tracked comes after the RBI’s advice. Consumer Affairs Secretary Nidhi Khare said the RBI had advised the department to expand the list of monitored commodities. The 38 commodities constitute close to 31 per cent of the total CPI (consumer price inflation) weights as against 26.5 per cent of CPI weights captured by the 22 commodities.
Uneven rainfall poses challenge
While the RBI is expected to keep holding rates this time, many expect it to start cutting rates by the end of the year or early next year. However, experts say uneven rains may keep the food inflation challenge intact.
“The risk of food inflation continues to remain elevated as key agrarian states in northern India and the Eastern Gangetic plains continue to experience deficit rainfall”, said Rajani Sinha, chief economist, CareEdge.
Kharif sowing has increased 2.3% since last year, but these growth numbers could be misleading, as last year witnessed poor sowing activity because of El Nino induced disruptions, Sinha said. Compared to July 2022, the area sown has actually decreased by 2.4%, primarily due to poor sowing of pulses. “Going forward, even though a high base last year is going to pull headline inflation down towards 4% in Q3, there are upside risks to food inflation due to an uneven monsoon even as sowing of key summer crops are tracking better than last year,” Goldman Sachs said in a report.
A final solution for the RBI’s inflation problem?
Due to stubborn persistence of food inflation, Economic Survey 2023-24 called for a “re-examining” of the existing inflation-targeting framework adopted by the RBI. It pitched for the exclusion of food items, prices of which are driven by supply constraints rather than demand shocks, which distort the whole inflation picture as inflation could be well under control in other sectors. India’s Chief Economic Adviser V Anantha Nageswaran wrote in the Economic Survey that hardships caused by higher food prices for poor and low-income consumers can be addressed through direct benefit transfers or coupons for specified purchases valid for appropriate durations. “Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth. Deploying them to deal with inflation caused by supply constraints may be counterproductive,” the survey said.
A government panel tasked with revising the consumer price index is considering a substantial cut in the weighting of food, a move that could curb inflation spikes, Bloomberg has reported based on information from a person familiar with the matter. The panel, under the statistics ministry, is discussing a proposal to reduce the weight of food in the consumer price basket by as much as 8 percentage points. The food and beverage category makes up 54.2% of the current CPI basket.
The CPI is currently based on consumer spending patterns surveyed in 2011-2012, which economists say are outdated and may be distorting the official inflation data the central bank uses to set interest rates. More recent surveys show consumers are spending less of their budget on food than they did a decade ago.
(With inputs from agencies)