Food cost remains a drag on inflation
May inflation numbers as expected, with CPI at 4.7% and WPI at 2.6%. Food remains main driver. RBI's interest rate decision hinges on next months' food inflation and monsoon performance.
Inflation numbers for May were on expected lines. The headline print for both the Consumer Price Index (CPI) and the Wholesale Price Index (WPI) can be termed benign. To be sure, at 4.7% the former is still above the 4% target of the Reserve Bank of India (RBI). The latter has seen a big increase compared to last month from 1.3% to 2.6%, but that is mainly on account of base effects. For both CPI and WPI — they are very different in composition — food continues to be the primary driver of inflation.
What is the larger import of these numbers? With the general elections behind us and the next election cycle a few months away, the political salience of the inflation numbers is expected to come down a bit. But they will matter a lot in the next few months because inflation is a critical factor that influences RBI’s decision on whether to bring down interest rates. They have been held at 6.5% since February 2023 and there is a growing opinion, even within the Monetary Policy Committee (MPC) of RBI, that this could be taking a toll on economic growth. The impressive headline GDP growth numbers aside, there is good reason to be concerned about both private consumption and investment right now.
Will RBI pivot soon? The answer depends on what happens to food inflation in the next two months. This, in turn, will depend on the performance of the southwest monsoon, which started on a good note but has weakened in the second week of June. Adequate rainfall is essential for a good kharif crop and adequate water in reservoirs and moisture in the soil are needed to ensure a good rabi crop. Overall rainfall just staying in the ballpark of the long period average is no guarantee of agricultural production doing well anymore. Rains are increasingly becoming temporally and geographically skewed, inflicting a lot of damage on the prospects of a good agricultural season. Monetary policy can do little to address this matter except to keep track of the numbers. Hopefully, things will be clearer when the MPC meets next in August. The larger picture, however, is increasingly clear: The climate crisis and its supply-side shocks to food markets are capable of impacting overall growth prospects.
