Welcome let-up in retail inflation

There is cheerful news on the price front with February’s retail inflation recording a seven-month low at 3.61 per cent, below the Reserve Bank of India’s (RBI) target of 4 per cent.

Average retail inflation for the current quarter so far is also below 4 per cent at 3.9 per cent. Inflation for the quarter is expected to rule below 4 per cent. The decline in inflation is on account of the fall in food inflation, which has now touched 3.75 per cent, the lowest since May 2023. Food inflation has been easing since October last year, when it had breached 10 per cent. Vegetables, which had led the food prices in the past, have seen a fall in prices in recent months. Oils, fats, fruits and cereals have not shown an easing of the firm trend but last year’s highs may not be seen in the near future. 

This year may not see a repeat of the conditions which had adversely affected agriculture and led to an all-round rise in prices. Kharif food grain production is estimated to have increased by 7.9 per cent from the previous year, while Rabi production is expected to increase by 6 per cent. Rice, wheat and maize may see record output, and other crops such as millet, tur, and gram may see higher production.

It is estimated that agriculture and allied activities may see a growth of 4.6 per cent in 2024-25, as against 2.7 per cent in the previous year. That makes the food inflation outlook benign. In 2024, the average food inflation rate was 8.4 per cent while the average retail inflation rate was 5.3 per cent. High inflation had affected spending and consumption. The proportion of per capita consumption expenditure on food items was 47.04 per cent in rural areas and 39.7 per cent in urban areas in 2023-24. 

Core inflation is also moderate. Sectors such as education, health, transport and communication have seen subdued price pressures. It is likely that the fall in inflation may prompt the RBI to cut the policy rates when the Monetary Policy Committee (MPC) meets next month.

A cut in the policy rates and easing of liquidity conditions can help impart a better growth momentum to the economy. The expected improvement in agricultural output can also create demand, especially rural demand, and contribute to higher growth. However, there is need for caution.

This year’s monsoon outlook is not known yet, though it is expected not to be bad. Even if the monsoon is favourable, climate change and extreme weather events can affect agriculture. Governments need to be prepared to address such eventualities.