The Reserve Bank of India (RBI) maintained its interest rates last week, suggesting a potential delay for any reductions as the focus shifts to controlling inflation to a steady 4%. Climbing food inflation contributed significantly to the consumer price index, rising 8.30% in January. Retail inflation is predicted to average 5.4% for the current fiscal year ending in March. Economists have identified that core inflation has shown resilience despite economic growth.
Reserve Bank of India’s (RBI) Stance on Interest Rates
The RBI has decided to persist with its existing interest rates, hinting that any reduction may be deferred while attempts are made to curtail inflation to 4% on an enduring basis.
Impact and Pattern of Food Inflation Changes
Remarkably, food inflation which constitutes around half of the entire consumer price basket, increased 8.30% in January, a slight drop from a 9.53% surge in December. January saw a 7.83% increase in year-on-year cereal prices compared to a 9.93% surge in the earlier month, while veggies prices rose by 27.03% as opposed to December’s 27.64% increase, the data indicated.
Reactions by Key Economists
“The Consumer Price Index (CPI) inflation came softer than our expected figures,” mentioned Upasna Bhardwaj, chief economist at the Mumbai-based Kotak Mahindra Bank. Nevertheless, she added, uncertainties regarding food inflation will likely result in the central bank remaining vigilant in the near future.
Future Inflation Projections
According to estimates, the central bank predicts retail inflation to average 5.4% for the fiscal year ending this March. For the following fiscal year, it’s forecasted to average 4.5%. In terms of core inflation, which disregards changeable food and energy costs, it stood at roughly 3.6% in January, a slight decline from the 3.8%-3.89% range in December, as per two economists.
The Scenario of Housing Inflation
“Housing inflation has been weaker than expected, despite strong urban demand,” Gaura Sen Gupta, an economist at IDFC First Bank (NASDAQ:) pointed out. It is important to note that core inflation figures, although not disclosed by the Indian government, have dropped despite the healthy economic growth.
Indian Economy and Food Price Volatility
Largely riding on unpredictable food prices, inflation has become prominent over the past year, exacerbated by climate changes and supply disruptions from geopolitical events. The RBI recently stated that substantial and recurrent food price disruptions were affecting the rate of disinflation.
Tackling the Inflation
To deal with the inflation situation, restrictions have been initiated on the stock of wheat that traders are permitted to stock, in order to increase its availability and moderate prices. However, there is a ban on the export of wheat, specific grades of rice, and onions with the objective of containing inflation. Economists anticipate that moderating food prices may ease pressure on retail inflation. “Price pressures are dissipating in earnest and we see rate cuts in the latter half of the year,” stated Shilan Shah, a senior economist with Capital Economics.