Keeping lid on food prices is key to easing inflation
It is good news for consumers that retail inflation has eased to an 11-month low of 5.88% in November on the back of global cooling in commodity prices and the rising cost of borrowing. This is the first time the inflation rate has fallen within the upper limit of the Reserve Bank of India’s tolerance limit of 6% since December last. The sharp fall surprised the analyst community since they had predicted only a marginal correction to 6.40%. The cooling of food inflation to 4.6% in November, as against 7.01% in the preceding month, has played a major role. Food inflation accounts for nearly half the Consumer Price Index (CPI) on which inflation is measured. While softening global commodity prices has contributed to inflation easing, one must also commend government intervention for keeping food prices in control, especially those of cereals, pulses and edible oils.
To counter rising inflation in recent months, the RBI has hiked the repo rate by 225 basis points since May, taking the terminal rate to 6.25%, the highest since March 2019. This has increased the cost of funds, and we have seen a fall in investment in recent times. It is, therefore, not surprising that along with the easing of retail inflation comes the bad news that industrial output contracted by 4% in October, the lowest in 26 months. This is a matter of concern as it flags the slowing of the economy.
The bright side is the central bank will now be ready to pause rate hikes as inflation is seen easing towards 5% in the first quarter of the next calendar year. With inflation under control and easier access to credit, we can expect economic growth and employment to pick up. However, there is no time to rest on our laurels. The sharp deceleration of food prices is unlikely to sustain, and analysts expect that for December, retail inflation may rise again in the 5.9%–6.1% band.
There are many other imponderables, like the Ukraine war; a sudden shortage of crude oil supplies may send fuel inflation spiralling. What has worked wonderfully is the market intervention to control food prices, and the government will do well to sustain this policy. Continuing money transfers to those at the bottom of the pyramid, along with a tight check on prices and anti-hoarding measures, can further ease
inflationary pressures.