The Reserve Bank of India is all prepared to announce the policy rate on Thursday with a big challenge in the form of food inflation, symbolized in “thali” or food plate.
Analysts continue tracking the price of food items in the thali and represent food inflation, which apparently looks stubborn. The Monetary Policy Committee of the Reserve Bank of India may keep the key interest rate at 6.5% because of the sustained food inflation. The high prices of food stay high due to weather fluctuations and deficiencies in the agriculture sector, even as inflation in the other sectors remained in check.
With the RBI having raised its policy rate from a low of 4% since February 2023 to 6.5%, there has been a long pause to allow the overall disinflation process to take a more consolidated hold. High food prices were thus mirrored in overall disinflation. Therefore, economists have once again penciled in a status-quo on interest rates this week.
Experts showed, has set the stage for high food prices to overrule the softening core inflation and the global contours that are tilting the world towards lower borrowing costs. MPC is likely to keep headline CPI inflation at 4%, though the same has stayed above the mandated target for 57 months in a row, with supply-side disruptions due to the pandemic and the Russia-Ukraine war having, in any case, made food prices very high.
Why Food Inflation Is a Big Worry
A series of incremental rate hikes by the RBI in an attempt to align and then rein in inflation did give hopes as the CPI inflation did slip within comfortable limits from September 2023 onwards. The latest RBI bulletin, however points to the fact that for the economy, inflation remains a sore point and food prices are a big contributor to this.
Food inflation shot up in June 2024, taking overall CPI inflation to 5.1 per cent from 4.8 per cent the month prior-May. This was on account of rising prices of vegetables, cereals, milk, and fruits. Food inflation shot up to 9.4%, although on a low base effect of last year, perpetuated majorly by perpetual high vegetable prices.
Vegetable inflation continues to remain worrying at 29.3% in June, as against 27.4% in May. Both TOP (tomatoes, onions, potatoes) inflation and non-TOP inflation for vegetables have shown a significant increase. Despite some price rise on a monthly basis, as a result, tomato inflation decelerated marginally to 26.4% from the very high base of 41.3% last year. Non-TOP vegetable inflation quickened to 19.7% from 18.8%, driven by vegetables like leafy vegetables, brinjal, lady’s finger and pumpkin. Foodgrain inflation stayed sticky at 10.2%, mildly lower than last month, along with building cereals inflation at 8.8% from 8.7%.
Government’s Initiatives to Control Food Prices
Government has already been stabilizing the food prices by selling vegetables and pulses at concessional rates, putting limits on stock and banning exports. In such attempts, the government has been trying to ensure that the interests of the farmer and the consumer are balanced, not allowing prices to dip sharply at a time when the crop is sold at the farm level, while also making sure the fact that the consumers are not paying exorbitant prices. In case of any increase in rates, the government is monitoring daily prices of 22 essential commodities and would be keeping an eye on 16 more to stabilize rates through policy interventions. The expanded list, as suggested by the RBI, proposes to cover 31% of the total CPI weights, compared with 26.5% earlier.
Fallout of Uneven Rainfall
While the RBI is sure to hold rates this time, experts are still expecting rate cuts towards the end of the year or early next year. But uneven rainfall could keep food inflation high. The scenario, a deficit rainfall in such key agrarian states in northern India and the Eastern Gangetic plains, is raising recessionary concerns underpinning inflation in food products. The kharif sowing has increased by 2.3 prop this year than last year’s 30.054 million hectare but the growth is misleading because that time El Nino- related disruptions caused poor sowing activity. Compared to July 2022, sowing in the area has come down by 2.4 per cent mainly due to weak pulses sowing.
Rethink Inflation Targeting Framework
The Economic Survey 2023-24 has said there is a need to rethink the RBI’s targeted inflation framework which would exclude food articles, where the price rise is due to supply side constraints than a demand shock. It now indicates that the chief economic adviser, V Anantha Nageswaran, has advocated direct benefit transfers or coupons to support poor and low-income consumers to manage the high food prices. A government committee is deliberating whether the weight of food in the consumer price index basket should be reduced by up to 8 percentage points to give a more accurate representation of newer consumption patterns, which suggest that people spend less of their budgets on food. This adjustment would also result in a reduction of inflation spikes and a little better reflection of the true course of inflation in making monetary policy decisions.
