There has been a “modest” decline in the food’s share in the average per capita monthly consumption expenditure (MPCE) of households in the past decade, which may not impact CPI inflation readings substantially, Reserve Bank of India’s Monetary Policy Committee (MPC) External Member Jayanth Varma told FE.
“If the food weightage drops more than 10 percentage points in the new CPI series, only then it will make a significant change in inflation readings,” said Varma. “As of now, I doubt there would be much of an impact.”
As per the findings of the all-India Household Consumption Expenditure Survey 2022-23, a decline in the share of food items in the consumption basket in the last decade, the fall was less steeper than widely expected.
Food’s share in MPCE for rural households decreased to 46.4% in 2022-23 from 52.9% in 2011-12, the immediate past year for which survey results are available, while that of urban households declined to 39.2% from 42.6%. Several economists had earlier expected the food’s share in the consumption basket to fall around 35-36% at the aggregate level, but as per the current data, it’s around 43%.
Therefore, the new Consumer Price Index series, set to be updated in 2025, may only witness a slight decline in the food items’ weight. The current CPI, with the base-year 2012, accords 39.1% weight to food items, while ‘food and beverages’ constitute 45.9% of the index.
Former MPC member Mridul K Saggar said that food’s weightage may be reduced to around 40% in the new CPI series. “It is clear that there is an upward bias to CPI numbers as food is the driving force. Once the new series is constituted, inflation prints could be lower,” Saggar said.
On monetary policy, Varma mentioned that the central bank’s rate-setting panel is unlikely to consider the present survey for its decisions because the statutory mandate is to look at the CPI. “We will have to wait till the new series comes,” he said.
The RBI is mandated to keep CPI inflation at 4% with a 2% tolerance band on either side. The January CPI inflation print was at 5.10%, and it’s expected to fall gradually in the coming months. For FY25, the RBI has projected CPI inflation to average 4.5%, lower than 5.4% projected in the current fiscal.
Saggar expects rate cuts to take place during August or September meetings of the MPC, provided there are no more shocks.