Retail inflation data for January provides a clear reminder as to why the RBI’s Monetary Policy Committee opted last week to not only hold benchmark interest rates but also chose to remain resolutely focused on achieving durable price stability. While the data for Consumer Price Index-based price gains show the headline number having eased from December’s 5.69% to a three-month low of 5.10% last month, inflation readings for key food items including cereals, vegetables and pulses continued to stay elevated at 7.83%, 27% and 19.5%, respectively, despite moderating from December’s levels. Among the vegetables sub-group, 12 of the 19 items monitored by the Centre for Monitoring Indian Economy (CMIE) posted accelerations in year-on-year price gains last month from their readings in December, signalling that the underlying trend in inflation is persistently high. Cereals, which have the heaviest weight in the food group, also stayed stubbornly stuck in a higher trajectory, with the month-on-month inflation for the sub-group that includes the key staple of rice, barely nudging lower at 0.75%, compared with December’s 0.76%. Rice was the primary drag, with its price at non-PDS outlets accelerating both sequentially and on-year, by 1.02% and a six-month high pace of 13%, respectively. With a recent CMIE estimate for rabi sowing of rice, revealing a 2.7% drop from last year, the prospect of prices softening significantly in the near future appears remote.
The data on reservoir storage levels also add to the disquiet on the outlook for prices, particularly of food items. With water storage at 150 reservoirs showing live storage as on February 8 at 49% of capacity, and lagging appreciably behind both the year-earlier and average of the last 10-years levels, output of the rabi sown crops, including cereals and more particularly pulses, are at risk of being impacted. Given food’s large share in the overall consumption basket, food price gains pose a wider risk to overall price stability, both directly and through spillover to the prices of non-food items, as a research article by RBI officials concluded. The central bank’s survey of households’ inflation expectations found the median inflation expectation for three months ahead rose by 10 bps from the previous survey in November to 9.2%, with a greater share of respondents — 78% versus 74% two months ago — expecting inflation to accelerate in the near term. With talks between the government and some farmers’ groups breaking down and farmers threatening to intensify an agitation over demands that include assurances on a guaranteed minimum support price, policymakers face a challenge to ensure inflation does not rebound and undermine overall macroeconomic stability.
