Price worries: On inflation

India's consumer price inflation has moderated slightly, dropping from a 14-month high of 6.2% in October to 5.5% in November 2024. This decline is largely attributed to a reduction in food price inflation, although food inflation remains elevated. The news also highlights the growing economic pressures, particularly on rural consumers, and the ongoing discussions about monetary policy adjustments by the Reserve Bank of India (RBI).

Moderation in Inflation Due to Food Price Cooling

• Food Price Trends: The overall food inflation showed some respite, with significant cooling in the prices of vegetables (down from 42.2% to 30%) and food grains rising at the slowest pace in 28 months.
• Pulses and Oil Prices: Pulses saw a cooling down to just over 5% after a prolonged period of high inflation, but edible oil prices continued to rise sharply by 13.3%, driven by global price increases and domestic policy changes.
• Rural Inflation Impact: Despite some relief in certain food items, rural consumers faced nearly 6% inflation, with higher food prices affecting their purchasing power more severely than urban consumers.

Inflation's Spillover Effects on Manufacturing and Services

• Cost Pressures on Businesses: Manufacturing and services sectors reported heightened cost pressures, compelling firms to raise prices at the highest pace in 12 years.
• Government's Response to Inflation: While the government maintains that food price volatility should not dictate monetary policy, it faces increasing concerns about the broader impact of inflation on the economy.
• Impact on RBI's Inflation Forecast: The RBI raised its inflation forecast for the October-December period from 4.8% to 5.7%, expecting inflation to remain above its target of 4% until mid-2025.

Debate on Interest Rate Cuts and Fiscal Measures

• Interest Rate Cut Expectations: There are increasing expectations of an interest rate cut in February's RBI Monetary Policy Committee (MPC) meeting, though the latest data suggests that inflation might cool further and growth could pick up slightly, reducing the urgency for such a move.
• Fiscal Prudence and Growth Support: The government may hope that its Budget for 2025-26, which will be presented before the February MPC meeting, will demonstrate fiscal discipline and propose measures to alleviate living costs, bolstering the case for rate cuts.
• Monetary Policy Deliberations: Despite pressures for a rate cut, the RBI's cautious stance indicates that any decision will be balanced with concerns about economic growth and inflation trends, which are expected to moderate in the coming months.

Practice Question:

Q. Assess the current state of inflation in India and its impact on different sectors of the economy. How should the Reserve Bank of India approach monetary policy adjustments in light of these trends?