The RBI’s monetary policy meeting, last week, just days before the expected release of the monthly consumer price index data by the government came as a surprise. Food prices in India have been constantly peaking. Lately, India’s high food inflation has been featured in the global media, including BBC. However, they seemed to have had little impact on the central bank’s inflation management policy for now. The need for fixing a higher prime lending rate to control inflation and fixing rigorous lending norms to prevent reckless accumulation of sticky assets with a section of borrowers somewhat fail to occupy the central bank’s monetary policy agenda. The RBI’s monetary policy committee decided to keep the repo rate unchanged at 6.5 percent for the third time in a row last Thursday. The decision came as a relief to bank borrowers at the cost of the common man’s growing concern for feeding their stomach in the face of high food inflation.
The RBI governor’s assessment of the current consumer price inflation and forecast for the financial year appear to be more casual than real. The summer monsoon-fed Kharif crop production plays a big role in food price movement. This season, monsoon rains have been highly uneven and nationally below average. The paddy cultivation in West Bengal, the largest rice producing state, has already been hit by poor rainfall in several districts. “Inflation projection for Q2 (July-September) of FY24 has been revised up substantially, primarily due to price shock from vegetables. Given the likely short term nature of these shocks, monetary policy can look through high inflation prints caused by such shocks for some time,” the RBI governor said while being particularly worried over the spike in the prices of tomatoes. What about the highly rising prices of edible oils, drugs and pharmaceuticals, healthcare expenses, increasing education and travel costs? It would be too simplistic to link high tomato and vegetable prices to the current inflationary trend to make it appear as a seasonal impact. The galloping healthcare expenses are a big concern before the common man.
Interestingly, central banks in several countries, including those in advanced economies, have lately taken proactive measures to prevent possible growth of inflation by raising interest rates early or retaining such rates even after consumer price indices get softened. They include Brazil, Canada, the Euro Area, the UK and the USA. In China, the inflation rate in January, 2022 was 0.9 percent when it fixed the interest rate at 3.7 percent. Its inflation rate dropped to zero percent in June, this year, but the central bank of the People’s Republic decided to keep the interest rate at 3.55 percent. In the Euro Area, the interest rate was raised from zero percent in January, last year, to 4.5 percent in June, this year, with the rise in the inflation rate. At the end of June, 2023, the prime lending rates in several countries were maintained at a high level despite the slowdown in their inflation rates. The interest rate in Brazil was as high as 13.75 percent. During the first quarter of 2023, Brazil’s economy rebounded more than the expected lines despite a drag from high interest rates. A booming farm sector is paving the way for Brazil’s rosier annual growth outlook.
Although global inflation is predicted to ease steadily in 2023, interest rates will stay at peak levels for some time, with important implications for GDP growth, bond yields, exchange rates and economic risks. The Economist Intelligence Unit’s (EIU) award-winning forecasts, analysis and data explain how higher interest rates impact the macroeconomic outlook. Inflation may have eased in many countries but central banks are cautious about slashing interest rates immediately. In the USA, the inflation rate dropped from 7.5 percent in January 2022 to three percent in June 2023. But, the interest rate was lately hiked to 5.5 percent. Earlier, in response to higher inflation, the Federal Reserve had raised the effective Federal Funds interest rate from 0.08 percent in January 2022 to 3.08 percent at the end of September 2022.
The RBI’s six-member monetary policy committee raised the 2023-24 inflation projection from 5.1 percent to 5.4 percent amid increasing food prices. In June,the RBI had lowered its inflation forecast for the current financial year to 5.1 percent from an earlier estimate of 5.2 percent. The RBI has been mandated by the government to keep consumer price index-based inflation (CPI) at four per cent with a band of +/- two percent. Earlier, this month, Morgan Stanley said it expects India’s retail inflation to leap to 6.2 percent at the September quarter end, against its previous forecast of 5.5 percent, due to higher food inflation. In a report titled ‘Assessing Risks to Inflation Trajectory’, Morgan Stanley said it expects India’s CPI inflation during July to be around 6.2-6.4 percent.
The ongoing food price inflation is not unique to India. It is a global trend. And, there lies the problem. High food prices in India are partly linked with rising global food price inflation. For instance, India is the world’s second-largest consumer and number one importer of vegetable oil. And, the prices of edible oils are shooting up across the world. Lately, Argentina has cut the soybean crop outlook by another 10 percent. China is importing more soybean and vegetable oils. At the same time, biofuel mandates are adding to bullish vegetable oil prices. Global vegetable oil prices are set to rise for the remainder of 2023 driven by tightening supplies, global biofuel targets and China’s return to the market, Oilworld analyst Thomas Mielke had said. Meanwhile, India’s edible oil imports in July rose to a record 1.76 million metric tonnes as refiners built up stocks for upcoming festivals in view of uncertainty over supplies from the Black Sea. Edible oil imports by India cost the country around $25 billion, last year.
Making light of the current surge in the consumer price inflation by the RBI to keep borrowers happy may prove to be politically expensive for the National Democratic Alliance (NDA) government at the centre ahead of the scheduled Lok Sabha elections in the first quarter of the coming financial year. Should the inflationary trend persist, the RBI may be forced to raise the policy repo rate in October in the midst of the country’s busy economic season. That may come rather late drawing more flack from the industry and trade. The constant downtrend of the Indian currency’s exchange rate accompanied with growing imports at higher rates are bound to have an impact on both the future wholesale and retail price inflation in the country. The RBI’s monetary policy committee may have ignored these aspects while maintaining the repo rate. (IPA Service)