After creeping above the Reserve Bank of India’s (RBI) upper-tolerance limit of 6 per cent in October — and stoking much hand-wringing — inflation based on the Consumer Price Index pulled back in November. The retraction was triggered by the easing of food inflation. A drop in vegetable inflation and a softening in cereals and pulses inflation lowered the food gauge to 9 per cent in November from 10.9 per cent in October.
Food inflation, however, remains uncomfortably high, keeping the headline elevated this fiscal and well shy of the 4 per cent lower tolerance limit. This has constrained monetary policy rate cuts.
Despite the November nudge-down, food inflation was responsible for 72 per cent of the on-year rise in headline — up from ~45 per cent in April and 67 per cent a year ago. Average food inflation this fiscal so far has risen to 8.4 per cent vs 7.5 per cent last fiscal. Clearly, the pressure has increased.
Meanwhile, the non-food inflation category maintained a modest rise on subdued domestic demand and softer global energy and commodity prices. But some upside in this category could be expected as rural demand strengthens after an adequate monsoon. The overall expectation, though, is of benign non-food inflation this fiscal.
Interestingly, some sections of the populace, feeling a greater pinch of stubborn food inflation, might be seeking cost-of-living adjustments. This idea was mooted in the November issue of the RBI’s bulletin, which noted: “The pick-up in price rise of household services like those of domestic helps/cooks also reflects higher cost of living pressures due to elevated food prices beginning to transmit to these specific wages”.
The inflation rate for domestic helps/cooks rose to 3.6 per cent in November from 2.9 per cent a year ago. Similarly, the inflation rate for watchmen jumped to 5 per cent this November from 0.7 per cent last November. If spread to other wages, such a rise can push up non-food inflation.
Hence, the Monetary Policy Committee (MPC) would need to monitor these signs.
To be sure, the effect of inflation varies across income groups as the share of spending on food, fuel, and core categories differs. Essential items, such as food and fuel, occupy a greater share of the lower-income class’s consumption basket.
Higher inflation has, therefore, hurt this segment more and people would probably be most relieved when food prices fall.
So far this fiscal year, the gap between headline inflation for the rural poor and urban rich has doubled compared to last fiscal year, to 1.2 percentage points.
That said, the free foodgrain programme — Pradhan Mantri Garib Kalyan Anna Yojana (PMGKAY) — provides some respite to poorer households. Calculations based on the National Sample Survey Office’s survey results suggest the spending burden of consumers reduced by almost Rs 1 lakh crore or 0.4 per cent of the gross domestic product in fiscal 2024 due to the programme’s support.
The savings were higher in rural areas compared with urban areas. But for households not covered under the PMGKAY and for essential food purchases not covered in the programme, such as vegetables, spices and milk, soaring prices must have hurt. High food inflation eats into household discretionary spending.
Considering the stickiness in food inflation, the MPC has revised its inflation forecast upwards for this fiscal by 0.2 percentage points to 4.8 per cent and expects to reach its target in the September 2025 quarter.
In the coming months, inflation is expected to soften on a sharper decline in food prices. This will ride on two factors: one, fresh arrivals of vegetables and kharif crops in the market and two, a statistical high-base effect, especially in vegetable inflation, as it missed the seasonal decline last winter.
Within food, inflation in most categories is already cooling. Cereals inflation is down to 6.6 per cent from 8.6 per cent in April, while pulses inflation has slid to 5.4 per cent from 16.8 per cent. But vegetable inflation, which was at 27.8 per cent per cent in April, is back to similar levels.
The repeated resurgence in vegetable inflation keeps the upside risk to food inflation rife. Another contributor is edible oils, which recorded a 30-month high inflation rate of 13.3 per cent because of global supply disruptions and an increase in import duties. Since October, this category has seen the fastest sequential climb.
In our base case, we expect inflation to average 4.6 per cent this fiscal with some upside bias to the forecast and expect a policy rate cut in February.
The writer is Principal Economist at CRISIL Limited. Views are personal
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