Inflation in May was in line with expectations. Both the headline indicators, Consumer Price Index (CPI) and Wholesale Price Index (WPI), can be described as benign. Indeed, the former, at 4.7%, is above the Reserve Bank of India’s (RBI) target of 4%. The latter rose significantly from 1.3% to 2.6% over last month, but this was mainly due to base effects. Food continues to be the main driver of inflation in both the CPI and WPI, which have very different compositions.
Will the RBI reverse course soon? The answer depends on how food inflation performs over the next two months, which in turn depends on the state of the southwest monsoon. (Hindustan Times)
What is the larger significance of these figures? With the general elections over and the next election cycle just a few months away, the political significance of the inflation figures is expected to subside a bit. However, inflation will be significant in the coming months as it is a key factor influencing the RBI’s interest rate cut decision. With inflation remaining unchanged at 6.5% since February 2023, there is growing sentiment even within the RBI’s Monetary Policy Committee (MPC) that this may be having a negative impact on economic growth. Impressive GDP growth headlines aside, there are good reasons to be concerned about both private consumption and investment at this point in time.
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Will the RBI change course anytime soon? The answer depends on how food inflation plays out over the next two months. This depends on the state of the southwest monsoon, which started well but weakened in the second week of June. Adequate rainfall is essential for a good kharhu harvest, while adequate reservoir water and soil moisture are needed to ensure a good rabi harvest. Overall rainfall remaining within the long-term average range is no longer a guarantee that agricultural production will be good. Rainfall is becoming increasingly uneven in time and geography, taking a toll on the prospects of a good agricultural harvest. There is little monetary policy can do to address this issue other than keep track of the numbers. Hopefully, the picture will be clearer when the MPC next meets in August. But the bigger picture is becoming increasingly clear. The overall growth outlook may be affected by the climate crisis and the supply-side shock it will pose to food markets.
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