Concerns regarding inflation in India amid strong demand, as reflected in the robust 7.6 percent GDP growth in the September quarter, have been alleviated by the November consumer price inflation data. Core inflation, excluding food, fuel & light, and vehicle fuel, has decreased, providing comfort to the Reserve Bank of India (RBI).
Decline in ‘Core Core’ Inflation:
The CMIE’s ‘core core’ retail inflation, a measure that excludes food, fuel & light, and vehicle fuel, dropped from 4.5 percent in October to 4.2 percent in November 2023.
Food-Driven Increase in Headline Inflation:
While headline inflation rose from 4.9 percent in October to 5.6 percent in November, this increase was primarily driven by food prices, which surged by 8.7 percent. Vegetable prices, in particular, witnessed a significant 17.7 percent rise. The RBI has limited influence over seasonal fluctuations in food prices, but the government has taken steps to stabilize them.
Persistent Food Inflation:
Food inflation in India has shown remarkable persistence, with the retail food index increasing by 27 percent between November 2019 and November 2023. Cereals’ prices rose by 30 percent during this period, while pulses recorded a 51 percent increase. Vegetable prices, although in the spotlight, were surpassed by pulses, which saw a year-on-year increase of 20.2 percent.
RBI’s Concerns:
RBI Deputy Governor Michael Patra expressed concerns about inflation driven by perishables and their impact on overall societal welfare. The recurrent and intense nature of these shocks challenges the effectiveness of monetary policy, leading to inflation expectations and outcomes being impacted.
MPC’s Stance:
The Monetary Policy Committee (MPC) echoed these concerns, acknowledging that recurrent food price shocks hinder ongoing disinflation efforts. While core inflation remains stable due to past monetary policy actions, volatile headline inflation poses challenges for anchoring inflation expectations. A recent RBI survey found increased median inflation expectations for the one-year-ahead period among households.
Barclays’ Outlook:
Barclays economist Rahul Bajoria anticipates that food inflation will remain elevated in the near term.
Lower Core Inflation and Monetary Policy:
Lower core inflation is a result of reduced input costs for businesses, primarily due to favorable commodity prices, influenced by China’s slower economic growth. Expectations suggest that with global growth decelerating, commodity prices will likely remain low. While lower core inflation provides comfort to the RBI, elevated headline inflation is expected to prevent any relaxation of monetary policy.
Conclusion: The decline in core inflation, coupled with persistent food inflation, presents a complex challenge for the RBI in managing inflation expectations and monetary policy in the face of global economic dynamics.