However, with the inflation forecast based on continued falling food prices in the economy, it may hit a large section of population and worsen rural distress.
While many Indians have been breathing easy with constantly falling food prices, which has helped cool inflation prompting RBI to cut repo rate twice in a row, it is India which may very well soon bear the cost of this happiness with resulting rural distress.
The RBI today cut key interest rate by 25 basis points for the second time in a row in its bi-monthly review of monetary and credit policy, citing a low inflation in the near-term. However, with the inflation forecast based on continued falling food prices in the economy, it may hit a large section of population and worsen rural distress.
Within the food group, 4 sub groups — vegetables, sugar, pulses and fruits — continued to experience deflation in February 2019, according to the RBI.
“A sustained food disinflation is not an optimal way of living when a big section of population in the country is dependent on it,” said Upasna Bhardwaj, Vice President — Treasury and senior economist at Kotak Mahindra Bank earlier this week.
The continued food deflation will have a bearing on consumption in the economy which determines rural demand. And, as demand comes down, whatever the early signs of pick up in investment has been seen so far will slow down again as incentive to invest would fall, Bhardwaj said.
Although the fall in food prices would stop, food inflation will continue to be low, EY India chief policy advisor D K Srivastava told Financial Express Online. The deflation in food prices is due to both structural and seasonal element.
The deflation is not likely to continue as the demand picks up with seasonality and other push factors such as additional income in the hands of farmers, and increase in agriculture income with fall in cost of credit, Srivastava said.
However, the structural element, which is determined by the lower share of an average household expenditure on food prices, would continue to keep the pressure on food prices down, he added.
Srivastava recommended to have a separate target range of +/- 2 per cent (0-4 per cent) for food inflation just like CPI to ensure that rural incomes are stabilised.