Opinion Ashok Gulati writes: Why RBI should resist further interest rate hikes

However, on the inflation front, India is still not out of the woods. The consumer price index (CPI) inflation in February was at 6.44 per cent, a notch higher than the upper end of RBI’s tolerance band. It is worth noting that inflation is now widely spread out across various commodity groups, with fuel and lighting (energy) leading at 9.9 per cent, followed by clothing and footwear at 8.8 per cent, prepared meals at 8 per cent and food and beverages at 6.3 per cent. But, since food and beverages carry the highest weight of 45.9 per cent in overall CPI, it is important to tame it as it hurts the poor most.

While monetary policy specialists are betting on whether RBI will raise the repo rate by 25 bps or not, my take is that India needs to navigate the inflation and growth puzzle carefully. Much of our food inflation is a supply-side phenomenon and tightening monetary policy further may not succeed in taming inflation.

Let us look at food inflation carefully. Cereal inflation is at 16.7 per cent and within this wheat/atta (non-PDS) inflation is 25.4 per cent. While this is worrying, having insulated more than 800 million people through free cereals (5kg per person per month) through PDS supplies, it is not a cause for alarm. In any case, raising the repo rate will not have any impact on this. It is better to use buffer stocking and trade policies to tame food inflation. In the case of wheat, the Food Corporation of India (FCI) has already unloaded roughly three million metric tonnes (MMT) of wheat to beat mandi prices down from about Rs 2,700-2,800 per quintal two months ago to roughly Rs 2,200-2,300 per quintal today. It is only a matter of a month or two when retail price inflation in wheat will also drastically drop. The coming crop is robust, and the government expects it to be a record crop of 112 MMT. FCI hopes to procure 34 MMT with Punjab, Madhya Pradesh, Haryana and Uttar Pradesh likely to contribute most of it. Even if the situation turns out to be contrary to what the government expects, it always has an option to import as global prices of wheat have come below $300/tonne. Remember, in FY23, despite a ban on wheat exports, India exported about 5 MMT of wheat. As far as rice is concerned, FCI has ample stocks in excess of buffer norms that it can load at any time and beat down rice inflation (non-PDS) from 11.2 per cent to less than 5 per cent. The procurement season for rice is over and FCI can do open market operations of rice at any time. In short, RBI can wait and watch for another month or two. But, I feel cereal inflation will be down.

However, I am worried about milk inflation, which is raging at 9.6 per cent and has a high weight in CPI. Remember that India is the largest producer of milk with 221 MMT in FY22. The value of milk is more than the value of rice, wheat, all pulses, and sugarcane, put together. Although some people in the milk business feel that the government’s production data of milk is not very reliable, as they also felt for wheat production last year, yet from an inflation point, I feel the preferred course of action should be through trade policy rather than monetary policy. The basic import duty on skimmed milk powder (SMP) is 60 per cent plus a 10 per cent cess for agriculture infrastructure development. Indian SMP prices are way above global SMP prices. Bringing down the basic import duty from 60 per cent to say 15 per cent in a calibrated manner can augment the supplies of milk in the country and keep a lid on consumer prices of milk. Action today will save the government from milk woes in the summer months.

Spices are another group where inflation is surging at 20 per cent, with jeera at 39 per cent and dry chillies at 33 per cent. The solution again will be to use trade policy and lower import duties to about 15 per cent, which today hover between 30 to 60 per cent.

RBI must also heave a sigh of relief that none of the TOP vegetables (tomatoes, onions and potatoes) is giving any trouble. Their inflation is in the negative zone. In fact, onion farmers are up in arms protesting against the abnormal drop in onion prices. I wish the government was as active in supporting farmers from dampened prices as it is to put a lid on higher prices. In the case of onions, the solution is to help onion farmer organisations set up dehydration units, so that in times of glut large quantities of onions are dehydrated and supplied to bulk consumers like armed forces, hospitals, hostels, hotels and restaurants.

In a nutshell, it is time for the RBI to pause and think, and resist further hikes in the repo rate. Instead, advise the government to use buffer stocking, trade and agro-processing policies to keep food inflation within the tolerance band.

Gulati is Distinguished Professor at ICRIER. Views are personal