In that debate, Reserve Bank has clearly opted or a hairline stance on inflation control rather than take note of the fall in GDP growth as a handle to start a rate easing cycle. RBI kept the policy repo rate at 6.5%. Those looking forward to seeing growth rate as the supreme objective of policy, were possibly disappointed.

Inflation-growth dilemma is nothing new in policy narrative. This time it took a new urgency as the second quarter GDP figures clearly showed sharp deceleration in the pace of the economy.

The Reserve Bank has clearly sided with caution and conservatism in that debate. In its monetary policy announced on Friday, December 6 , the monetary policy committee of the RBI has favoured retaining the current policy stance with unchanged policy rather than accede to the demands of a rate cut.

Prices are rising consistently above the RBI’s tolerance band of 4%, plus/minus 2% for the greater part of the current fiscal year. The band is meant to be a comfort zone. However, if the price rise rate consistently remains above the upper limit, albeit none too wildly, all along, then it becomes difficult to be complacent about it.

More important is the nature of the price rise. The overall inflation is getting overly influenced by the persistently strong rise in food prices. Since these items have a close to 50% weightage in the consumer price index, the overall index is strongly rising. Leaving aside the food and fuel inflation, commonly called the core inflation, the rise is not that much robust.

However, the Reserve Bank does not expect the food prices to ease before end of February and early March next year. So, till then, until the arrival of the winter crops in the market, the Reserve Bank apparently wishes to play it cool.

Let us look at the price inflation figures a little closely to understand the nature of the current rises in prices.

The Reserve Bank takes the consumer price index —CPI— as the measure of inflation for its policy formulation. In that context the movements in CPI are important. It is also pertinent to remember that it is food inflation which hurts the common people most and the weakest sections of society are hit particularly. The governor, Shaktikanta Das, was at pains to explain this point at his policy statement today.

According to the statement, the CPI headline inflation increased from average 3.6 per cent during July-August to 5.5 per cent in September and further to 6.2 per cent in October 2024. Incidentally, this was the highest spike in more than a year, since September 2023.

Of all the categories, the prices of food items rose the fastest much to the policy maker’s discomfort. The CPI food inflation surged to 8.4 per cent in September and firmed up further to 9.7 per cent in October 2024 from an average of 5.2 per cent in during July-August, according to RBI governor.

As a result, the contribution of food group (with a weight of 45.9 per cent in the CPI basket) to headline inflation increased from around 68 per cent during July-August to around 74 per cent in October. A sharp pick-up in price momentum across vegetables, and oils and fats in a scenario of rising inflation in cereals, meat and fish, and fruits led the upsurge in food inflation.

In other words, food prices rose across the board and that too sharply for all major groups. You can some comfort that some kinds of unhealthy food prices rose faster, like those for oils and fats, which could hopefully lad to better health outcomes!

The price momentum in oils and fats firmed up sharply to 3 per cent in September and further to 6 per cent in October. But alongside these, the momentum in vegetables prices, which are consumed by all and particularly the poorer people, increased to 3.5 per cent in September and further 8.2 per cent in October.

Leaving aside the food and fuel inflation, which measures th core inflation trends, CPI Core inflation recorded the lowest inflation of 3.1 per cent in the current series during May-June before edging up to 3.5 per cent in September and further to 3.8 per cent in October 2024.

These essential items apart, the price rises were moderate and in some categories there were decreases like those for LPG or fuel oils. Some high value items, like personal cares, also showed moderate trends.

So taking these details into account, a rough cure emerges that prices should keep rising until the current crop and winter vegetables start coming into the market. And that should not be before the end of march next year. Hence, the cautionary tale from the RBI.

But, as the saying goes, “picture abhi baki hai”. Second quarter growth has been disappointing. It was a meagre 5.4%. This has been ascribed to mainly a few reasons, of which the drop in industrial sector, particularly in manufacturing sector, has been the most acute. From the first quarter growth of 7.4%, manufacturing sector slid to a 2.1% in the second quarter. The drastic sudden fall has not been really fathomed as yet fully.

Along with this, with heavy downpour of this year, the other major sector, mining, had suffered badly. This had also resulted in lower demand for cement and cement output had fallen.

On a perusal of the high frequency indicators available so far, Reserve Bank is optimistic that the slowdown in domestic economic activity bottomed out in the second quarter of 2024-25, and since on way to a recovery, aided by strong festive demand and pick up in rural activities.

Agricultural growth is supported by healthy kharif crop production and better rabi sowing. Industrial activity is expected to normalise and recover from the lows of the previous quarter. The end of the monsoon season and the expected pick up in government capital expenditure may provide some impetus to cement and iron and steel sectors, RBI expects.

Mining and electricity are also expected to normalise post the monsoon-related disruptions. The purchasing managers’ index (PMI) for manufacturing at 56.5 for November remained elevated. The services sector continues to grow at a strong pace. PMI services remained steady at 58.4 in November, indicating continued expansion.

So, overall Reserve bank is seemingly saying that let us take care of the runaway prices for the time being. Growth will take care of itself in the meantime. Once, the hump of high prices is crossed, we will resume growth momentum with, maybe, a lower interest regime. (IPA Service)