India’s latest inflation data presents policymakers with a frightening choice: whether to respond to the latest acceleration in retail price gains to a five-month high with more interest rate hikes, or to halt monetary tightening so that the fragile to allow development to gain more traction. , Inflation data based on the Consumer Price Index (CPI) shows retail price gains on a revival trajectory, with food prices rising. Vegetables and grains were the biggest offenders, up 18% from a year ago and up 2.6% from the previous month; Main cereals, including rice and wheat, rose 11.5% from September 2021 and rose 2% from August’s levels. The combined weight of these two foods in the overall CPI is 15.7% and account for more than a third of the cumulative weighting of the food and beverage category. Rice prices continue to rise due to an estimated 6% reduction in kharif production, the government’s efforts to curtail supply through export restrictions on non-basmati rice. Heavy rains at the end of monsoon have hit vegetable production, causing wholesale level prices to jump 39.7% in September, with month-on-month gains alone exceeding 10%. Therefore, the forecast for food prices remains clouded by uncertainty, with risks sloping upward, at least in the short term.
The continued depreciation of the rupee against the dollar has worsened the outlook for price stability, making it difficult to counter imported inflation through monetary measures. As RBI Deputy Governor Michael Patra noted at the central bank’s monetary policy committee meeting last month, India is a ‘net commodity importer, with over a third of the CPI being imported’ complicating policymaking. especially when the terms of trade become unfavourable. Also, with five of the six service categories registering gradual inflation, it is difficult to disagree with RBI Governor Shaktikanta Das’s argument that the policy should aim at preventing price pressures from widening. Still, with the latest private sector production trends in S&P Global’s survey-based manufacturing and services PMI data for September, a renewed slowdown, and a growing global slowdown point to a decline in demand for India’s exports. However, the outlook for development appears weak. Given that monetary policy influences real interest rates with a varying lag, it may be a difficult but prudent choice to heed the dissenting voices of the MPC’s Ashima Goyal and Jayant Verma, and till the haze of uncertainty and a clearer picture of interest rates. Raising rates should be avoided momentarily. Price and growth trends come to the fore.