Statsguru: RBI’s Monetary Policy Committee stares at a tough decision

Under the current government, the consumer food price inflation (CFPI) rate steadily declined from 6.4 per cent in FY15 to near price stagnation in FY19

The Monetary Policy Committee of the Reserve Bank of India (RBI) could see itself in a fix when it meets in June. While on the one hand, this will be the first meeting under a new government, on the other, inflationary pressures are likely to overpower growth concerns if the past trends hold true.

Under the current government, the consumer food price inflation (CFPI) rate steadily declined from 6.4 per cent in FY15 to near price stagnation in FY19, Chart 1 shows. Core inflation, which excludes fuel and food from headline inflation, however, remained sticky. But now, headline inflation, which had diverged from core inflation for about a year, has started to converge into it, shows Chart 2.

The reason? the food inflation rate is looking up. The impact? It is expected to rise further if it follows wholesale food inflation as it has done in the past (Chart 3). Wholesale Price Index (WPI) for food articles has already crossed 7 per cent in April. Early impact has started to show up in cities, as urban food inflation reached 4.6 per cent (Chart 4).

Though rural prices are benign (Chart 5) mostly due to supply side shocks (over production in farm sector), rising inflation in cities might force the MPC to maintain status quo, rather than lower policy rates. This is at a time when investment needs a strong push to counter the cyclical slowdown.

Adding to the concerns is rising consumer spending on health and education. Inflation in these important spends has started moderating from sub-9 per cent only recently, Chart 6 shows.

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StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines; Compiled by BS Research Bureau