What IMF has to say on food price inflation
Food inflation is mostly structural and govt policy to resolve this seems to mostly result in further accentuating the problem due to multiple interventions
February’s consumer price inflation numbers have a bit of good news: food inflation has slowed to 5.3% in February from 6.85% in January.
The immediate question that pops to mind is: does this open up space for a rate cut?
Well, sighting one swallow doesn’t herald the beginning of the summer.
Unseasonal hailstorms have raised the spectre of rabi crop damage in north India and fears of accelerating food price inflation. That warrants caution.
Food inflation in India is particularly insidious like in most emerging markets, an International Monetary Fund (IMF) study released last week said.
Not only is food inflation more persistent, food price shocks have a deeper impact on non-food inflation.
“In rich countries, a 1% shock to food prices results on average in a 0.15% increase in non-food prices, but in poor countries the average is about 0.3%,” says the IMF study.
In India, food inflation is mostly structural in nature.
Government policy to resolve this issue seems to mostly result in further accentuating the problem due to multiple interventions.
Look no further than cereal prices: while export restrictions try to hold consumer prices down, rising minimum support prices and the resulting high stocks tend to raise them.
When these issues are quite some time away from being solved, monetary policy needs to be tight, warns IMF.
“In the interim, monetary policy will need to remain tight to anchor inflation expectations at a lower level,” the book said.
In other words, it has called for higher interest rates for a prolonged period of time.
And here’s a second statistic from the February release that is not so much good news: services inflation is creeping up.
The so-called miscellaneous part of the Consumer Price Index, or CPI, recorded a 4.38% increase in February, compared with a 3.79% rise in January.
Sure, the Reserve Bank of India, or RBI, may very well decide to cut rates further. But that will probably be because of the government sticking to the fiscal consolidation target, rather than on account of temporarily lower food prices.
Editor's Picks »
- Chief technology officers of Reliance Jio, Bharti Airtel quit
- IIT-Bombay generates ₹17.99 crore revenue in 2017-18, highest among IITs
- EPFO payroll data shows 4.4 million jobs created in 9 months till May
- Dubai recipe for economic success looks stale as markets slump
- CWC meet: Rahul Gandhi says BJP attacks institutions, Dalits, and poor
- What ABB India’s performance in June quarter says about capex growth
- Bajaj Finance does well in Q1 even as competition hots up
- Kotak Mahindra Bank: The perils of being priced to perfection
- Higher cane price crushes hopes of sugar mills
- Market optimism before 2019 general election: History may not repeat itself