India’s latest inflation data present policymakers with a fraught choice: whether to respond to the latest acceleration in retail price gains to a five-month high with more sizeable interest rate increases, or pause the monetary tightening so as to allow fragile growth to gain more traction. Inflation figures based on the Consumer Price Index (CPI) show retail price gains on a resurgent trajectory with food prices leading the charge. Vegetables and cereals were the biggest culprits, with the prices of the former surging 18% from a year earlier and rising a substantial 2.6% from the preceding month; staple grains, including rice and wheat, climbed 11.5% from September 2021 and increased 2% from August levels. These two food items have a combined weight of 15.7% in the overall CPI and account for more than a third of the food and beverages category’s cumulative weight. Rice prices have continued to rise in the face of a projected 6% shortfall in kharif output, the Government’s efforts to ease supply through export curbs on non-Basmati rice notwithstanding. Heavy rains at the monsoon’s tail end have hit vegetable output, causing wholesale level prices to accelerate by an eye-watering 39.7% in September, with month-on-month gains alone exceeding 10%. The forecast for food prices, therefore, remains clouded with uncertainty, at least in the short term, with the risks tilted to the upside.
The rupee’s continuing depreciation against the dollar has further roiled the outlook for price stability, with imported inflation hard to counter through monetary measures. As RBI Deputy Governor Michael Patra noted in the central bank’s Monetary Policy Committee meeting last month, that India is a ‘net commodity importer, with over a third of the CPI being imported’ complicates policymaking, especially when the terms of trade turn unfavourable. Also, with five of the six services categories registering sequential inflation as well, it is hard to disagree with RBI Governor Shaktikanta Das’s argument that policy must be aimed at preventing price pressures from broadening. Still, with the latest private sector output trends in S&P Global’s survey-based manufacturing and services PMI data for September flagging a renewed slowdown, and a looming global recession pointing to a decline in demand for India’s exports, the outlook for growth appears tenuous. Given that monetary policy affects real interest rates with a distinct lag, it may be a difficult but wiser choice to heed the MPC’s dissenting voices of Ashima Goyal and Jayanth Varma and refrain momentarily from raising interest rates till the fog of uncertainty lifts and a clearer picture of price and growth trends emerges.