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Journalism of Courage
Between February 8, 2023 and February 6, 2025, the Reserve Bank of India (RBI) kept its key short-term ‘repo’ lending rate for banks unchanged at 6.5%.
This roughly two-year period (February 2023 to January 2025) saw inflation based on the official consumer price index (CPI) average 5.2% year-on-year. It was even higher, at 7.6%, for the consumer food price index (CFPI).
At the same time, the so-called core inflation rate – which excludes food and fuel items from the CPI to compute the annual price increase – was only 4.1%. The relatively low ‘core’ inflation was cited by many, then, as reason enough for the RBI’s monetary policy committee to cut interest rates.
Food and fuel inflation are largely driven by supply-side factors – such as rainfall, temperature and other weather-related phenomena affecting crop output or geopolitical developments and production policies of major petroleum exporting nations.
Given the inherently volatile nature of food and fuel inflation – which monetary policy cannot effectively address, as interest rates primarily work by influencing borrowing costs and aggregate demand in the economy – the RBI, it was argued, should focus on ‘core’ than the headline ‘general’ CPI inflation.
While RBI has since reduced its repo rate, by 0.25 percentage points each on February 7 and April 9 to 6%, the pressure to do so came earlier. Union Commerce and Industry Minister Piyush Goyal had, on November 14, stated that it was an “absolutely flawed theory” to consider food inflation while deciding on interest rates. The Finance Ministry’s Economic Survey for 2023-24, too, had pointed to the “anticipated easing” of rates by RBI being “delayed” despite core inflation falling to 3.1% by June 2024.
Reversal of trend
The accompanying chart shows CFPI inflation ruling consistently higher than general CPI inflation, and the latter exceeding core inflation, for an extended period from July 2023 to January 2025.
But the last two months have witnessed quite the opposite. CFPI inflation, at 1.8% in April 2025, was at its lowest since October 2021. It was below the headline inflation of 3.2%, which was itself the lowest since July 2019. On the other hand, core inflation, at 4.2%, was at its highest since September 2023.
Simply put, if the RBI were to target core and not headline inflation today, it would be less inclined to further cut interest rates. Core inflation is currently hovering above the central bank’s medium-term target of 4%!
India experienced two major episodes of food inflation in the last three years. Both were courtesy of supply-side shocks.
The first was Russia’s invasion of Ukraine in late-February 2022 that pushed up international agri-commodity prices. The UN Food and Agriculture Organization’s (FAO) world food price index (base value: 2014-16=100) soared to an all-time-high of 160.2 points in March 2022.
Even as the global supply disruptions from ‘war’, causing imported food inflation, eased towards early 2023, there came a second shock. This one had to do with ‘weather’, more specifically an El Niño event from around April 2023 to May 2024.
El Niño – an abnormal warming of the equatorial Pacific Ocean waters off the coasts of Ecuador and Peru, leading to enhanced evaporation and cloud-formation in that region at the expense of Australia, Southeast Asia and India – is generally associated with weak rainfall in the subcontinent.
The long and strong El Niño of 2023-24 did translate into subpar monsoon, post-monsoon and winter rains. It was accompanied by a delayed and short winter, culminating in heat waves from the second half of March to June 2024. The effects, in terms of lower crop production and elevated food prices, were felt from July 2023 through the whole of 2024.
What to expect
The end of El Niño, resulting in an above-average monsoon last year, followed by a mild La Niña (El Niño’s opposite ‘cold’ phase that normally contributes to good showers and lower temperatures in India), enabled an agricultural turnaround in 2024-25.
The benefits of that accrued with the kharif (monsoon-sown) crop’s market arrivals from late-2024. With a bountiful rabi (winter-spring) crop as well, food inflation pressures have ebbed since the start of this calendar year.
The India Meteorological Department’s forecast of above-normal rainfall for the ensuing southwest monsoon season (June-September), no El Niño expected in 2025, and the FAO food price index of 128.3 points for April well below its March 2022 peak (the US Department of Agriculture projects record production of wheat, rice, corn and oilseeds for 2025-26), the outlook for CFPI inflation looks benign going forward.
Equally encouraging is oil prices: Brent crude is trading at just over $65 per dollar, as against $75 three months ago and $83 last year at this time. And it isn’t only food and fuel.
Three months back, the rupee was in free fall, touching an all-time-low of 87.99 to the dollar on February 10. This, even as India’s official foreign exchange reserves plunged from $704.89 billion to $623.98 billion between September 27 and January 17. The uncertainties unleashed by Donald Trump taking over as US President triggered a net pullout of some $22.7 billion by foreign portfolio investors (FPI) from India’s equity and debt markets during October 2024-February 2025. Trump’s sweeping “reciprocal tariff” actions led to further outflows of $2.34 billion in April.
Those uncertainties have subsided somewhat in recent weeks. The rupee closed at around 85.5 to the dollar on Friday, forex reserves had recovered to $690.62 billion as of May 9, and FPI have made net purchases of $1.3 billion so far this month.
While food prices seem well under control, there are two reasons to believe why so is core inflation. The first is the rupee stabilising and not breaching the 90-to-the-dollar mark, where it appeared headed not too long ago. The threat of imported inflation from a depreciating rupee has been contained for now.
The second factor is the prospect of cheap imports from countries such as China and Vietnam, which are having to redirect their exports away from the US due to Trump’s tariffs. In the last two months alone, India has imposed anti-dumping import duties on many Chinese goods – from aluminium foils, vacuum insulated flasks and polyvinyl chloride paste resin, to solar glass and titanium dioxide – in addition to a 12% safeguard duty on specified flat steel products.
A stable rupee, disinflationary pressures from Chinese imports, soft global oil and commodity prices, and the improved domestic food supply position should make it easy for the RBI to further cut rates in its upcoming monetary policy reviews. Neither food nor core inflation must worry it too much.
