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A healthy winter harvest of vegetables reined in food inflation to a five-month low of 6% in January, driving down India’s consumer price inflation to 4.3%, tantalisingly close to the 4% median target pursued by the Reserve Bank of India (RBI). For urban consumers, in fact, inflation eased to 3.9%, while rural consumers faced a much-moderated 4.6% uptick in prices. This constitutes some relief for households, especially the urban middle class which has been awaiting relief from food inflation and has pulled back on other spending. If inflation holds around this level for some time, this may have broader connotations for consumption and growth impulses gathering fresh steam. The RBI, which slashed interest rates last week in anticipation of declining inflation, must be relieved too. As per its own reckoning, with this quarter expected to average 4.4% inflation, there may be a minor uptick from January’s 4.3% price rise over this month and March. On Thursday (February 13, 2025), citing the inflation decline and the RBI’s projection of an average inflation of 4.2% in 2025-26, Finance Minister Nirmala Sitharaman exuded confidence in Parliament that food prices will be under control this year, with farm output estimates suggesting a healthy uptick.
Some dark clouds, however, loom over this benign inflation outlook that is expected to create more room for the central bank to cut rates further and support growth. With the rupee declining 4% against the U.S. dollar so far in the second half of 2024-25, imported inflation can play spoilsport, particularly on fuels, and edible oils where imports constitute 60% of India’s consumption needs. If commuting costs, which accounted for the highest chunk of households’ non-food spending in 2023-24, and cooking fuel costs flare up along with the price of fats to fry one’s meals, household budgets will be exacerbated afresh. Edible oil prices have been rising sharply for a few months already, with high global prices compounded by the Centre’s decision to impose import duties. They were up 15.6% in January, the highest in almost three years. Wholesale prices for edible oils jumped 33.1%, indicating there is likely more pass-through of these costs in retail prices. Any weather shocks this coming summer and monsoon could also undo food price gains. The RBI, which is seeking to curb the volatility in the rupee, will be mindful of these risks, and having retained a neutral monetary policy stance, may hold off on its growth pursuit if warranted. To alleviate price pressures, the government, after unveiling income tax cuts to boost middle class consumption, should be open to slashing indirect taxes — fuel levies, import duties, and GST — as they affect all sections of society, including the most vulnerable.
Published – February 15, 2025 12:10 am IST
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Catching a break: On the inflation dip and households
