Looking beyond the CPI numbers

India’s benchmark inflation rate, as measured by the Consumer Price Index (CPI), came in at 6.2% in October. This is beyond the upper limit of the Reserve Bank of India’s (RBI) tolerance band and the highest inflation print since August 2023. Once again, the inflationary spike is a result of high food inflation, especially in vegetables and edible oils. The non-food non-fuel core inflation number, while it continues to inch up, is still below its historical average, once gold is taken out. Core inflation is generally taken as a better measure of whether or not an economy is overheated. At 3.7% core inflation, the Indian economy seems anything but.

What are the policy implications of the latest inflation numbers?

Almost everybody has written off a possible rate cut in the December meeting of RBI. To be sure, there is still a widespread consensus that RBI will bring down interest rates in its February meeting. Most analysts are factoring in normalisation of food inflation going forward. A good monsoon leading to a bumper summer crop and the likelihood of vegetable inflation going to the other extreme from its current high are key factors behind this premise. Once the ongoing state elections are over, we could also see a more aggressive supply-side intervention by the government in key vegetable and edible oil commodities.

To be sure, these domestic market upsides will now have to reckon with significant economic turbulence from the changed geo-economic environment which a Trump presidency-triggered trade war could bring. One will have to wait to see whether the monetary policy committee changes its tone and also a projection of inflation forecasts when it meets in December. What could complicate matters further for monetary policy is the fact that a protectionist United States (US) can also generate significant growth risks on account of Chinese excess capacity being redirected towards the non-US economies. With fiscal policy already in contraction mode — this is in keeping with the laid down fiscal glide path — growth cannot be taken for granted.

India’s inflation managers have been fighting a long battle against wildly fluctuating food (especially vegetable) prices without a suitable tool to do so. Extreme weather events caused by the climate crisis have made this fight even more difficult. A mercantilist and policy-wise unconventional White House may further complicate the economic policy landscape.

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