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Informist, Wednesday, Nov. 20, 2024

 

NEW DELHI – Inflation in India is already "biting into" urban consumption demand, corporates' earnings and capital expenditure, and there are early signs of spillovers of high food prices, the Reserve Bank of India staff said in a paper. And, if inflation is "allowed to run unchecked, it can undermine the prospects of the real economy, especially industry and exports," said the paper on the 'State of the Economy' in RBI's bulletin for November, which was released on Wednesday.

 

India's headline CPI inflation rose to a 14-month high of 6.21% in October from 5.49% in September, mainly because of a sequential rise in food prices. October was the first month since August 2023 when headline inflation was above the upper bound of the RBI's medium-term target range of 2-6%. 

 

Inflation has stayed high since the COVID-19 pandemic, falling below the RBI's medium-term target of 4% only twice since September 2019--in July and August, which were heavily impacted by base effects. It is expected to stay higher in the near term as well, with economists saying the November print could also be near 6%. In fact, economists now expect inflation to average closer to 5% in 2024-25 (Apr-Mar) compared to the central bank's forecast of 4.5% for the year. 

 

"High frequency food price data for November up to 12th show an increase in cereals (mainly driven by wheat and atta) and broad-based pressures in edible oil prices," the paper said, adding that pulses prices except of tur also rose. Among key vegetables, potato and onion prices increased, while tomato prices recorded a sharp moderation, the paper said.

 

"What is worrying is that apart from the sharp surge in the momentum of food prices, core inflation has edged up (in October)," the staff paper said. Core inflation rose to a 10-month high of 3.7% in October from 3.5% in September.  The paper is authored by RBI officials, including Deputy Governor Michael Patra, and the views expressed in it do not necessarily reflect those of the central bank.

 

According to the paper, there are early signs of second order effects or spillovers of high primary food prices. Following the surge in prices of edible oils, processed food prices are starting to see an uptick, the paper said. The government had in September raised import duty on crude and refined edible oils, which has lead to a rise in prices of these oils. Oils and fats inflation rose to 9.51% in October from 2.53% in September, while food inflation rose to a 15-month high of 10.87% in October from 9.24% the previous month.

 

The pick-up in price rise of household services like those of domestic helps and cooks also reflects higher cost of living pressures due to elevated food prices beginning to transmit to these specific wages, the paper said. "In this environment, the hardening of input costs across goods and services and their flow into selling prices needs to be watched carefully."  End

 

Reported by Shubham Rana

Edited by Avishek Dutta

 

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