The spike in food prices has kept the Reserve Bank of India (RBI) worried even though overall inflation has moderated to a certain extent.

On April 5, the Central bank’s Monetary Policy Committee decided to keep the policy repo rate under the liquidity adjustment facility (LAF) unchanged at 6.50%. This is the seventh time that the rates have been kept on hold.

“The Monetary Policy Committee (MPC) remains focused on aligning inflation to the target on a durable basis. We derive satisfaction from the progress made under disinflation. But the task is not yet finished,” RBI Governor Shaktikanta Das said at a press conference after the MPC meeting.

RBI Monetary Policy updates | Policy repo rate unchanged at 6.5%; real GDP growth for FY25 projected at 7%

The MPC also decided to remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth.

Food price uncertainties

In his monetary policy statement, Mr. Das said, “Food price uncertainties continue to weigh on the inflation trajectory going forward. A record rabi wheat production would help temper price pressure and replenish the buffer stocks. Moreover, early indication of a normal monsoon augurs well for the kharif season.”

“International food prices also remain benign. The tight demand supply situation in certain categories of pulses and the production outcomes of key vegetables warrant close monitoring, given the forecast of above normal temperatures in the coming months,” he said.

“Frequent and overlapping adverse climate shocks pose key upside risks to the outlook on international and domestic food prices,” he said, adding that as per the Indian Mereological Department’s forecast, the months of April, May, and June will witness above normal maximum temperatures in most parts of the country. 

Volatile food inflation

Answering a question on what is fuelling food inflation, RBI Deputy Governor Michael D. Patra told The Hindu, “Food inflation has been highly volatile. In February 2024 it was 7.8% and the indications are that in view of adverse climate events recurring, it will remain high.”

“The actors keep shifting. Sometime it is cereals, then vegetables and currently it is protein which is eggs, meat and fish. There is some firmness in rice prices,” he said. “These are short duration spikes but since they occur on multiple occasions, they give a persistent character. So what we are worried about is that there should not be any spillover to the rest of the CPI. So we remain watchful, very closely.” Mr. Patra added.

Growth-inflation dynamics

Overall inflation has been controlled to a certain extent; since the last policy, the growth-inflation dynamics have played out favourably.

While growth has continued to sustain its momentum, surpassing all projections. headline inflation has eased to 5.1% during January and February 2024 from 5.7% in December 2023, with core inflation declining steadily over the past nine months to its lowest level in the series, Mr. Das said in his monetary policy statement.

He added that the fuel component of the CPI remained in deflation for six consecutive months; food inflation pressures, however, accentuated in February.

“Looking ahead, robust growth prospects provide the policy space to remain focused on inflation and ensure its descent to the target of 4%. As the uncertainties in food prices continue to pose challenges, the MPC remains vigilant to the upside risks to inflation that might derail the path of disinflation,” he said.

“Under these circumstances, monetary policy must continue to be actively disinflationary to ensure anchoring of inflation expectations and fuller transmission of the past actions. The MPC, therefore, decided to keep the policy rate unchanged at 6.50% in this meeting and remain focused on withdrawal of accommodation. The MPC will remain resolute in its commitment to aligning inflation to the target,” he added.

Fuel price deflation

Mr. Das said that cost push pressures faced by firms were seeing an upward bias after a period of sustained moderation.

“Deflation in fuel is likely to deepen in the near term, following the cut in LPG prices in March. Notwithstanding the cut in petrol and diesel prices in mid-March, the recent uptick in crude oil prices needs to be closely monitored. Continuing geo-political tensions also pose upside risk to commodity prices and supply chains,” he said.

Assuming a normal monsoon, CPI inflation for 2024-25 is projected at 4.5% with Q1 at 4.9%; Q2 at 3.8%; Q3 at 4.6%; and Q4 at 4.5% . The risks are evenly balanced.

Growth prospects

Around this time two years ago, when CPI inflation had peaked at 7.8% in April 2022, the elephant in the room was inflation, Mr. Das said. “The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis. In other words, it is essential, in the best interest of the economy, that CPI inflation continues to moderate and aligns to the target on a durable basis. Till this is achieved, our task remains unfinished,” he said.

On growth prospects, the Governor said that headwinds from geopolitical tensions, volatility in international financial markets, geoeconomic fragmentation, rising Red Sea disruptions, and extreme weather events pose risks to the outlook.

Taking all these factors into consideration, real GDP growth for 2024-25 is projected at 7%, with Q1 at 7.1%; Q2 at 6.9%; Q3 at 7%; and Q4 at 7%. The risks are evenly balanced.

Grocery item put on display for sale at a market, in New Delhi. File
| Photo Credit: Sushil Kumar Verma

India’s inflation woes are not over yet but food price spikes may be “transitory”, the Finance Ministry said on August 22, attributing the latest spike in headline inflation to global uncertainties triggered by the termination of the Black Sea Grain Initiative that has upset wheat and edible oil supplies, as well as disruptions in domestic farm output.

The impact of the global disruptions was “clearly evident” in the sharp surge in the retail inflation pace in July to a 15-month high of 7.44%, the Ministry said, noting that the 11.5% food inflation rate was “perhaps the third highest” since the current Consumer Price Index (CPI) series began in 2014. Core inflation, which excludes energy and food costs, was at a 39-month low of 4.9%, it emphasised.

The global uncertainty and domestic disruptions may keep inflationary pressures elevated for the coming months, warranting greater vigilance from the government and the central bank, the review stressed, underlining the need to bring the focus back on maintaining macroeconomic stability.

“Cereals, pulses and vegetables exhibited double-digit growth… [but] only 48% of food items have inflation of above 6%, and this includes 14 food items with inflation in double digits. Items like tomato, green chilli, ginger and garlic witnessed inflation of more than 50%,” the Ministry said in its monthly economic review for July.

Holding these “abnormal” upticks in some items responsible for fuelling high food inflation last month, the review said this is expected to be transitory. “Tomato prices are likely to decline with the arrival of fresh stocks by the end of August or early September. Further enhanced imports of tur dal are expected to moderate pulses inflation,” it pointed out, arguing that these and other government efforts “can soon materialise moderation in food inflation in the coming months”.

Dry conditions

Apart from the termination of the Black Sea Grain Initiative which has created “disorderly conditions around the supply of wheat and sunflower oil”, the Ministry noted that continued dry conditions in Canada and the U.S. have caused wheat prices to rise. “Subdued production growth of oil palm in Malaysia and concern over the production outlook of soybeans and rape seed in the U.S. and Canada led to a spike in vegetable oils price,” it added.

“Disruption in domestic production also aggravated the inflationary pressures. Interruption in the supply chain of tomatoes due to white fly disease in Kolar district, Karnataka and the swift arrival of monsoon in northern India caused a surge in tomato prices. Tur dal price also inflated due to deficient production in the Kharif season [of] 2022-23.”

Domestic consumption and investment demand are expected to continue driving India’s growth, but further global monetary tightening could hurt stock markets in emerging economies, the Ministry cautioned.