India's Inflation Conundrum: Tackling Rising Food Prices and Prioritizing Growth

With the consumer price index still above the Reserve Bank of India’s upper tolerance level, food prices continue to be a significant factor in India’s high inflation rate. The Monetary Policy Committee is debating whether to prioritise inflation control over economic growth as it considers additional rate increases, which will make the decision on interest rates challenging in the months to come.

Inflation Remains Above RBI’s Upper Tolerance Level

According to information published by the Ministry of Statistics and Programme Implementation (MoSPI), inflation based on the consumer price index (CPI) decreased slightly from 6.52% in January to 6.44% in February. The Reserve Bank of India (RBI) projects retail inflation at 6.5% for FY23, so even with the slight decline, inflation stays above the upper tolerance level of 6%. The food basket, particularly cereals and spices, is a major reason why rural regions experience higher inflation than urban areas. Inflation in the countryside was 6.72% in February, compared to 6.10% in the cities.

In particular, inflation in rural areas is higher than in urban areas due to the food basket, especially cereals and spices. 

Food Prices Are A Major Contributor To High Inflation

Food prices are a significant contributor to high inflation in India, accounting for around 40% of the consumer price index (CPI) basket. While vegetable prices have been in the deflationary mode for four consecutive months, inflation in cereals and products has been pushing retail inflation outside the Reserve Bank of India’s (RBI) comfort zone. 

In February 2023, cereal inflation increased by 16.73%, marking the sixth consecutive month of double-digit inflation. Consumer food inflation, on the other hand, declined by 5 basis points in February 2023 from January 2023. In particular, rural areas have been hit harder than urban areas, due to the food basket, especially cereals and spices. Rural inflation for February was 6.72%, while metropolitan inflation was 6.10%.

Core Inflation Remains Elevated

The high CPI inflation is concerning for economists. According to Rajani Sinha, Chief Economist at Care Edge, core inflation remains elevated at 6.3%. Madan Sabnavis, Chief Economist at Bank of Baroda, pointed out that prepared meals/foods have witnessed inflation of 8%, and there is concern about milk inflation at 9.7%, as the prices have been raised often this year to adjust for higher fodder costs. The prices will likely not come down, and spices inflation has peaked at 20%, which reflects demand-supply mismatches.

RBI’s Interest Rate Hikes Ineffective Against Inflation

Despite the Reserve Bank of India’s efforts to control inflation by raising interest rates by 250 basis points since May last year, there has been no significant and sustained reduction in retail inflation or the CPI basket. While there has been a slight decrease in the headline number, there is no clear trend towards a decline. While some believe that the Monetary Policy Committee (MPC) will increase the repo rate by another 25 basis points to 6.75% before pausing, others suggest that the RBI should wait and observe as the full impact of previous rate hikes has not yet taken effect.

Debate Over Growth vs Inflation

The Monetary Policy Committee (MPC) in India is expected to raise interest rates further to control rising inflation. However, there is also a debate within the committee about prioritizing economic growth versus inflation control. Some members, including Ashima Goyal and Professor Jayant R. Varma, are advocating for prioritizing growth, while others are concerned about the persistent inflation and the need to continue raising rates. As the MPC weighs its options, the decision on interest rates will likely be a difficult one in the coming months.

Insight

Inflation in India remains a concern, with the consumer price index still above the RBI’s upper tolerance level of 6%. Food prices, particularly cereal inflation, have been pushing up retail inflation, and core inflation remains elevated. Despite raising interest rates by 250 basis points since May 2021, there has been no sustained fall in inflation, and there is debate within the MPC over whether to prioritize growth or continue to raise rates to control inflation. The RBI Governor and other MPC members face a difficult decision in the coming months.