Opinion
Government’s reluctance to import wheat can upset MPC’s calculations
Summary
- A government in election mode could end up firing inflationary expectations that are in single digits at last for the first time since the pandemic
The Reserve Bank of India (RBI) has delivered a status quo policy, as was widely expected. Rightly so. Its six-member interest rates-setting committee that met from the 4-6 October decided unanimously to keep the policy repo rate unchanged at 6.50%, noting that the heightened Consumer Price Index (CPI) inflation levels in July and August at 7.4% and 6.8%, respectively, were largely driven by food price pressures.
Spikes in food prices following supply shocks, especially of vegetables such as tomatoes that were sold in the retail market for nearly ₹300 a kg in many parts of the country a few weeks ago, did not call for a response from monetary policy. By last month, with the arrival of fresh harvest, tomato prices had crashed to less than ₹5 a kg in farmer markets such as in Maharashtra.
The statement released by the Monetary Policy Committee (MPC) suggests that it is betting that the sharp increase in inflation seen in July, which was driven largely by tomato and other vegetable prices, and corrected partly in August, will show further easing in the data for September, when vegetable prices moderated considerably. The reduction in LPG prices earlier this week are clearly part of this calculus, and there’s comfort to be drawn from declining core inflation i.e. CPI inflation stripped of food and fuel.
However, the central bank is less convincing on its inflation forecast, which it has kept unchanged for FY24 at 5.4%.
There’s hardly a forecaster that has not raised their inflation forecast, adjusting for the evolving ground realities affecting pricing pressures. Just this week, the World Bank increased its retail inflation forecast for India for 2023-24 to 5.9% from the 5.2% estimate made in April.
It’s inescapable to anyone who cares to read the unmistakable signs that the country’s food grain production has suffered in the last two years due to back-to-back weather shocks, and regardless of the government insisting that there is record production of wheat and rice. It’s also clear that the upcoming assembly polls in wheat-producing states such as Madhya Pradesh are top-most on minds in New Delhi which leaves it with no appetite for antagonising the sizeable vote bank of farmers by importing wheat, the global prices of which have halved after the bumper harvest in Russia.
The tight conditions in the domestic markets for cereals then will ineluctably persist despite the government’s unprecedented, heavy-handed interventions in the food markets, including banning private players from buying in large quantities from farmers so as to ensure enough stock is available for the Centre to procure for its free food programme.
The cautious noises that came out of the MPC suggest that it’s conscious of these risks. A government in election mode could end up firing inflationary expectations that, as its statement released noted, are in single digits at last for the first time since the pandemic.
Sample these: “…overall inflation outlook is clouded by uncertainties from the fall in kharif sowing for key crops like pulses and oilseeds"; “the recurring incidence of large and overlapping food price shocks can impart generalisation and persistence to headline inflation" and “Monetary policy has to be in absolute readiness to take appropriate and timely action to prevent any spillovers from food and fuel price shocks to underlying inflation trends and risks to anchoring of inflation expectations… These are non-negotiable necessities"; “The MPC observed that the unprecedented food price shocks are impinging on the evolving trajectory of inflation and that recurring incidence of such overlapping shocks can impart generalisation and persistence. Accordingly, the MPC resolved to remain on high alert…".
The MPC statement has a cursory reference to the sustained pressures from cereal prices on CPI inflation.
Besides, Governor Shaktikanta Das reiterated that the MPC’s inflation target is 4%, not 2-6%. For long, it had seemed, and the policy debate in the broader community of economists reflected this too, that the MPC was simply keeping CPI inflation below the upper band of the target range of 6%, rather than aiming to anchor inflation at 4%. It’s welcome if it is planning to change that approach.
Back-to-back food shocks and that in the ongoing term of governor Das, the RBI has missed the inflation target twice, although it was generously exempted from explaining its failure on one of those occasions, also appear to be weighing on the MPC at last. The RBI is also one of the few central banks in the world that is yet to do a mea culpa on wrongly diagnosing high inflation as “transitory".
Who wants to take a bet on the RBI’s CPI inflation projection?
