22-November-2024-Editorial

RETAIL INFLATION IN OCTOBER TOUCHES 6.21%, CROSSES RBI TOLERANCE CEILING OF 6%

In October 2024, retail inflation, as reflected by the Consumer Price Index (CPI), rose to 6.2%.

Food inflation, monitored through the Consumer Food Price Index (CFPI), saw a significant increase, reaching 10.87%, its highest level since August 2023.

This inflation rate has breached the Reserve Bank of India’s (RBI) upper limit of 6%, underscoring continued price pressures despite a global trend of declining inflation.

Factors Contributing to High Retail Inflation in India

1. Escalating Food Prices

Food inflation reached a 15-month high of 10.8%, driven by rising costs of essentials:

• Vegetables: Prices surged by 42%, marking a 57-month high.
• Fruits: Experienced an 8.4% rise.
• Pulses: Increased by 7.4%.

2. Rising Core Inflation

• Core inflation, excluding volatile items like food and fuel, has seen an upward trend.
• Increased costs in household services have added to overall inflationary pressure.

3. Global Market Volatility

• India’s dependence on imports for edible oils has made domestic prices vulnerable to global supply chain disruptions.
• Recent hikes in global edible oil prices have directly impacted food inflation.

4. Adverse Weather Conditions

• Extreme weather events, such as heatwaves, have negatively affected agricultural output, leading to supply shortages and increased prices.

Implications of High Retail Inflation on RBI’s Monetary Policy

1. Delayed Interest Rate Cuts

• The RBI aims to maintain inflation within a 2%–6% range, with a target of 4%.
• With inflation exceeding this limit, immediate rate cuts are improbable.
• Experts predict rate reductions might occur in 2025 if inflation shows sustained moderation.

2. Focus on Inflation Management

• Controlling inflation remains a priority for the RBI to ensure price stability.
• Rising inflation impacts purchasing power and hinders economic growth.

3. Revised Projections

• The RBI had anticipated inflation to decline to 4.8% in Q3 and 4.2% in Q4 of FY 2024–25.
• With current trends, these projections may no longer be achievable, impacting the interest rate trajectory.

4. Policy Challenges

The RBI faces a dilemma:

• Inflation Control: Requires tight monetary policy, which could restrict growth.
• Economic Growth: Needs supportive measures to maintain momentum.

Persistent food price inflation and supply disruptions add complexity to policy decisions.

5. Risks of Persistent Inflation

Uncontrolled inflation can harm the real economy:

• Industries and exporters face rising input costs.
• Higher costs passed to consumers reduce demand and corporate profitability.
• Manufacturing sectors reliant on stable costs may suffer reduced margins.

Government and RBI’s Inflation Management Framework

Monetary Policy Framework Agreement (MPFA)

• Established between the Government of India and the RBI to maintain price stability while supporting economic growth.
• If inflation exceeds the 2%–6% range for three consecutive quarters, the RBI must:

• Report to the central government.
• Explain the reasons for high inflation.
• Propose corrective measures and an estimated timeline for returning to the target range.

Key Inflation Indicators

1. Consumer Price Index (CPI): Tracks changes in the retail prices of goods and services consumed daily by households.

Purpose:

• Monitors inflation for economic policy decisions.
• Guides governments and central banks in inflation targeting.
• Used to adjust dearness allowance and assess cost-of-living changes.

Base Year: 2012, calculated monthly.

2. Consumer Food Price Index (CFPI): Focuses solely on price changes of food items in the consumer basket.

Purpose: Tracks inflation in essential food products like cereals, fruits, vegetables, dairy, and meat.

• Base Year: 2012, calculated monthly by the Central Statistical Office (CSO), Ministry of Statistics and Programme Implementation (MoSPI).
• Coverage: Data released separately for rural, urban, and combined categories across India.

Conclusion

Rising inflation, particularly in food prices, poses significant challenges for India’s economy and monetary policy.

While the RBI strives to balance inflation control with economic growth, persistent price pressures require cautious and strategic approaches.

The government and RBI must address supply chain disruptions, global price volatility, and domestic weather challenges to stabilize inflation and ensure sustainable growth.