In the third week of October, the International Monetary Fund said in a blog post: “Let’s start with the good news: it looks like the global battle against inflation has largely been won, even if price pressures persist in some countries.” Less than two months from then, that confidence appears dented to an extent. With global inflation inching up again, rate cuts by the US Federal Reserve and monetary accommodation in many other major economies, including India, may be delayed, and/or turn out to be lesser. This could weigh down global activity. Worse, even the best laid plans of the central banks could go astray, if the incoming Donald Trump administration’s moves engender an escalation in global trade tariffs.
The Reserve Bank of India, in the past one year and more, has been bent on seeing inflation, as measured by the Consumer Price Index (CPI), moving to the 4% target on a durable basis. For eleven bi-monthly monetary policy reviews in a row, it kept the repo rate unchanged at 6.5%, but still had to contend with the headline print surging above the upper tolerance level to 6.2% in October. In the December policy review, the central bank raised the CPI inflation outlook for 2024-25 to 4.8% from 4.5%, with Q3 at 5.7% and Q4 at 4.5%, along with drastic downward revision of growth outlook. Going into 2025-26, the RBI projected Q1 inflation at 4.6% and Q2 at 4%.
If anything, the external outlook has only worsened since, with the US Fed now expected to cut only less in 2025. To be sure, the last mile of disinflation may throw up (negative) surprises, and global monetary outlook could substantially change. For the RBI, the situation has been compounded: it has to be grapple with the risk of continued outflow of foreign portfolio capital due to higher US treasury yield, and a weaker rupee that could jack up imported inflation. However, it could take heart from the fact that global oil prices are tending to be rather subdued.
Empirical analysis of the global inflation trends by the World Bank showed that the main drivers over the last five decades have been oil price shocks and global demand, rather than interest rates or supply issues. While the start of a monetary easing cycle from February is widely expected, the smoothness of the cycle would be contingent on sustenance of moderate energy prices, and mitigation of input costs pressure for businesses.
The domestic economy’s growth pangs, which looks more structural than cyclical or transitory, has made the RBI’s task unenviable. While the Gross Domestic Product (GDP) growth plunged to a seven-quarter low of 5.4% in Q2FY25, the jury is out on whether more generous monetary accommodation would salvage the situation. As the RBI deputy governor Michael Patra has opined, slower GDP print might be reflecting the effect of repeated inflation shocks. The economy’s productive capacity is looking strained.
The past year saw a debate on whether the RBI’s inflation-targetting framework needs tweaking. This was because a large share of food articles in the CPI basket has been seen to be the key reason behind the headline inflation being stubborn, and refusing to align with the target. The extreme volatility in the prices of perishable food items, particularly some key vegetables, keep exerting random pressure on the CPI (vegetable inflation, for instance, skyrocketed to 37.4% in July 2024, from -6.5% in April). The question is, if monetary tools aren’t rather blunt ones to address this issue, even though higher food prices have a proven spillover effect on personal services and consumer goods, and are capable of stoking more generalised inflation, if unchecked.
Those who seek lesser attention to food inflation while setting benchmark interest rates, the key tools of monetary policy, cite the CPI inflation excluding food was just 3.1% even in October, when the overall inflation suddenly surged, and that core inflation, which excludes volatile components of food and fuel, has stayed below 4% for the last 12 months in a row. The CPI base year is set to be changed to 2024 from 2012. The scheduled revision of the index, which will factor in the inputs from the latest household consumption expenditure survey, may reportedly lead to a marginal decline in foods’ weight in it.
Though the inflation gauge for the purpose of monetary policy would require rationalistion and to be made more contemporary, a call for exclusion of food from inflation-targetting framework is tantamount to turning a blind eye to people’s perception/experience of how prices impact their purchasing power.
Indeed, it is important for monetary-policy handlers to guard against the regime being restrictive of growth. The growth costs of policy should not be allowed to outweigh the gains on the price front. Yet, the impact of interest rates or other monetary tools on growth may not be as big as many would believe.
What stifles India’s growth – and to a large extent, that of the world economy– is a disconcertingly long absence of structural reforms. National economic policies are turning to be far more inward-looking and protectionist than anyone would have imagined, causing competition to suffer greatly, and scuppering further productivity gains. India, while being acutely aware of the vicissitudes of the global supply chains, and the geopolitical happenings, would need to resort to domestic growth drivers, more than ever after the economic liberalisation of 1990s. The key to reinvigorating the Indian economy is to reverse the trend of profit accumulation in larger companies, and steps that will boost household income, and economy-wide consumption demand.
Crisil highlighted in a recent report that average growth in India’s food production has slowed since the pandemic – for food grains, it was 2.8% in agriculture years (July-June) 2021-2024, as against 4.3% in 2017-2020. Food supplies have to be augmented and kept as much steady as possible through seasons, with policies designed to enhance agriculture productivity and ease food supplies.