Monetary policy can’t quell stubborn food inflation

There can be no discounting the abiding concerns of the Reserve Bank of India over headline consumer price inflation, and the persistence of high food inflation as the driver of this price rise. The September print for retail inflation, at 5.5 per cent, has been driven by food inflation of 8.3 per cent, and within food the 36 per cent rise in vegetable prices.

SBI Research pegs Q3 and Q4 inflation at 4.9 per cent and 4.6 per cent, respectively, higher than the RBI’s estimates of 4.8 per cent and 4.2 per cent. The October inflation reading is expected to be similar, with the rain-induced supply shocks keeping food inflation elevated. Whether it impacts the kharif standing crop and market arrivals remains to be seen. When the Monetary Policy Committee meets in the first week of December, it is likely to be faced with a paradoxical situation of elevated inflation (going by September and October data, as it would meet before the November numbers are out) and somewhat subdued growth. However, monetary policy cannot do very much to control food inflation, given that it is caused by supply bottlenecks rather than increase in demand. Nor can a case be made out that lower rates will incentivise storage or hoarding; the food price rise is more on account of fresh supplies being impacted due to exceptional rain.

The view that food inflation spills over into core inflation through ‘expectations’, and therefore needs to be checked by tight money policies, seems a bit overdone. It may not be far-fetched, therefore, to expect the MPC to stay the course in being more accommodative than in the past. A contraction in the factory index since May this year (the August reading being minus 0.1 per cent), and a flat trend between November 2023 and May 2024, does indicate growth stress. That said, the nature of inflation (food inflation in particular) deserves some attention. Overall, food inflation has been the key driver of headline inflation over the last 15 months, including September. Between July 2023 and September 2024, food inflation averaged 7.7 per cent and core inflation 4 per cent. In fact, it has averaged 7 per cent over the last five years, according to analysts.

A Reserve Bank of India paper (August bulletin) has conceded, after studying trends over four years ending this June, that food inflation is a “persistent” phenomenon. If vegetables prices and within these the tomato, onion potato group, have been volatile (vegetable prices have risen more than 25 per cent between March and September), cereals inflation too is significant at 7 per cent now, even if down from 13 per cent in May 2023. This is despite there being no real output constraints. The RBI paper cites climate change as the overriding factor in stubborn food inflation. This may not be the only force at work. Knee-jerk trade policy, market bottlenecks and poor yields are additional factors. While food inflation remains a conundrum, it is core inflation that is perhaps more relevant for monetary policy.