Central banks in major developed economies across the world are yet to begin cutting rates. However, recent events point towards the possibility of a divergence in policy across these countries.
Retail inflation, as measured by the consumer price index, eased marginally to 4.83 per cent in April, down from 4.85 per cent in March, as per data released by the National Statistical Office. The decline was driven, in part, by a softening of prices in the fuel and light segment. Core inflation remained subdued, while food inflation edged upwards to 8.7 per cent, from 8.52 per cent the month before. At a time when real interest rates are at levels that can be considered as “excessive”, this continuing divergence between food and core inflation presents a dilemma for the monetary policy committee.
The disaggregated data shows that within the food category, inflation remained elevated across several segments such as cereals, meat and fish, eggs, vegetables and pulses. There are, however, expectations of a good rainfall season this year — as per the India Meteorological Department, the southwest monsoon is “most likely to be above normal”. This would bode well for agricultural production, and also help keep a lid on prices. In the non-food category, inflation remained subdued in most of the segments such as clothing and footwear, household goods and services, recreation and amusement. The uncertainty over the trajectory of food inflation weighs heavily on the MPC — food inflation has now been above 8 per cent for many months. In his comments following the last committee meeting, RBI Governor Shaktikanta Das had said that the MPC must remain vigilant “as uncertainties in food prices continue to pose challenges.” A recent study by economists at the RBI has noted that “high food and fuel inflation can get generalised in the system through inflation expectations,” and that if inflation expectations are not anchored then the “impact of a food prices shock may not be transitory”.
Central banks in major developed economies across the world are yet to begin cutting rates. However, recent events point towards the possibility of a divergence in policy across these countries. In its last meeting, the US Federal Reserve had noted a lack of progress on the inflation front — in March, the consumer price index had edged up to 3.5 per cent, from 3.2 per cent the month before. Commentary from the Fed has led to a reassessment of when the central bank will begin to cut rates and by how much this year. Across the Atlantic, there are indications that the European Central Bank is likely to begin cutting rates in June. And in the UK, recent comments from the Bank of England also point towards the possibility of rate cuts this summer. In India, the RBI expects inflation at 4.5 per cent in 2024-25. However, as there remains considerable uncertainty over food prices, the minutes of the last committee meeting indicate that a policy pivot in the immediate future seems unlikely.
