Trends in Food Inflation and Monetary Policy

Published: June 3, 2019

The reduced growth rate and higher rates of unemployment have led to an expectation that the Reserve Bank of India (RBI) would cut the interest rates in the upcoming monetary policy review.

Under the Section 45ZA of the RBI Act 1934, the central government, in consultation with the Reserve Bank had notified the consumer inflation target of 4 per cent with a range of +/-2 per cent.

With the early trends showing the return of food inflation, the RBI s Monetary Policy Review Committee s meeting is keenly watched.

Trends in Food Inflation

  • The annual wholesale price inflation for food articles has risen from minus 0.42 per cent to 7.37 per cent between December 2018 and April 2019.
  • The year-on-year increase in the consumer food price inflation (which the RBI tracks) has increased from minus 2.65 per cent to 1.10 per cent.

Why it is said that Food Inflation is set to return?

  • Drought in large parts of western and southern India, coupled with early and harsher-than-usual summer.
  • Drought-induced fodder and feed shortages could be a major cause of cost push and drop in milk procurement. This would lead to upward pressure on the price of dairy products.
  • Since Maharashtra is expected to record 40 per cent lower cane area for the 2019-20 crushing season from October, it could be the key driver for inflation in prices of sugar.
  • India Meteorological Department (IMD) has issued a warning of the current weak El Nino conditions which is known to adversely impact rainfall in India.
  • The delay in the southwest monsoon is only adding to the uncertainty.

It is said that RBI would view it more as a necessary price correction in favour of farmers and may be inclined to ignore the return of food inflation.

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