Retail inflation dampens mood

 Consumer Price Index, which measures inflation in India, rose to 5.76 percent in May from 5.39 percent in April. To present further context, the figure stood at 4.83 percent in March. The jump in inflation is reportedly down to rising food and vegetable prices. 

Due to a spike in retail inflation, it is highly unlikely that the Reserve Bank of India will lower short-term lending rates in its next policy review in August. In its June monetary policy review, the central bank had raised concerns over rising inflation, though it left policy rates unchanged. 

Citing higher upside risks to “inflation trajectory”, the central bank retained the short-term lending rate (repo rate) at 6.5 percent and the cash reserve ratio (CRR) at 4 percent. Meanwhile, this month, food inflation rose to 7.55 percent– it was 6.4 percent in April – and vegetable price inflation jumped from 4.82 percent in April to 10.77 percent in May.

 The central bank expects a moderation in food inflation because of the Met department’s forecasts of an above-average monsoon. But the rise in the prices of petrol, diesel, and food items in the last month could lead to a further increase in costs. What's worse, reports indicate that global growth would be even lower than projected earlier. 

“Effectively, not only does it rule out any policy rate cuts by the Reserve Bank of India (RBI), it also puts the spotlight on the structural challenge of the supply chain in agriculture causing cyclical demand-supply mismatches in food items,” according to Mint, a leading Indian business newspaper. 

The unpredictability surrounding food production is down to India's over-reliance on the monsoon season. The June-September monsoon accounts for about 80 percent of India’s total rainfall and affects both summer and winter sowing and approximately 2/3rd cultivated land in India is dependent on monsoons, leaving it susceptible to the vagaries of weather. 

The southwest monsoon hit the Kerala coast on 8 June, a week later than expected. Though it advanced steadily into the rest of the southern states, weak cyclonic circulation over the Arabian Sea has delayed the onset of monsoon in western India by a few days. 

"The inflation surprise in the April reading makes the future trajectory of inflation somewhat more uncertain...rising crude prices and implementation of the seventh pay commission awards being the key risks," RBI Governor Raghuram Rajan said during the central bank's most recent monetary policy review. Some of the structural challenges mentioned in the Mint report were addressed by the RBI in its latest monetary policy review.

 “The expectations of a normal monsoon and a reasonable spatial and temporal distribution of rainfall, along with various supply management measures and the introduction of the electronic national agriculture market (e-NAM) trading portal, should moderate unanticipated flares of food inflation,” the RBI said.

 Despite the positive vibes it exudes, the central bank can do very little to mitigate the problem. These involve policy fixes in agriculture, and this has to be done at the executive level. At the central level, for example, besides a national market, we need well-regulated forward markets for agro products so that the farmer can take the right decisions.

  Global demand is still sluggish, crude oil prices are rising once again and the seventh pay commission is going to put more money in the hands of consumers. Thus, the chances of rising inflation are indeed high. Rajan remains right in keeping the rates unchanged. Caution before misguided optimism always bodes well for a developing economy. But the executive, both at the state and central level, need to step up and do their part.