Even as the retail inflation is hovering at an eight-year high level, its trajectory going forward is subject to considerable uncertainty and would primarily depend on the evolving geopolitical situation, according to the Reserve Bank of India’s Annual Report 2021-22. It said sharp movements in global commodity prices are having a significant bearing on food inflation dynamics in India.
“Though record foodgrains production and forecast of a normal south-west monsoon augurs well for food inflation, heightened uncertainty around global food prices arising from geopolitical risks might offset these positive domestic impulses, especially via elevated prices of wheat, edible oil, feed costs and key agriculture inputs like fertilisers,” according to the report, released on Friday.
It added that supply shocks impacted food inflation intermittently, exacerbated by imported price pressures, especially from global edible oil prices. Crude oil prices pushed up core inflation later in the year. “This experience also highlighted the important role of supply-side measures by the government in relieving price pressures in the case of edible oils and pulses, and in softening the pass-through of the sharp increase in global crude oil prices to domestic pump prices of petrol and diesel through timely reductions in excise duties and state-level value-added taxes (VATs).”
It said even as the release of pent-up spending supported aggregate demand, persisting supply disruptions fuelled inflation which increased markedly in the US, the Euro area and a number of emerging market economies (EMEs). Commodity prices increased sharply in 2021 from their lows a year ago as the nascent recovery in demand collided with supply bottlenecks.
“Volatility in the prices of international crude oil and key raw materials and intermediates, together with global supply chain disruptions, may push up input cost pressures. In particular, a scenario in which crude prices persist above US$ 100/barrel poses a major upside risk in terms of re-igniting second-round effects across manufacturing and services prices,” the RBI report said.
It added the resurgence in global commodity prices (prices of energy increased by 102.1 per cent; metals and minerals by 28.2 per cent; precious metals by 10.3 per cent; and agricultural commodities by 28.0 per cent year-on-year in March 2022) renewed supply chain pressures and heightened financial market volatility in the March 2022 quarter, shifted the trajectory of inflation sharply to the upside.
“Overall, headline inflation averaged 5.5 per cent in 2021-22 as against 6.2 per cent a year ago. Headline inflation breached the upper tolerance band in Q4:2021-22 and rendered the conduct of monetary policy challenging,” the RBI said.
The Consumer Price Index (CPI)-based inflation, which the RBI takes as a reference point while deciding on the monetary policy, in April 2022 soared to an eight-year high of 7.79 per cent, forcing the RBI to hike interest rates in an off-cycle monetary policy earlier this month.
It had stood at 4.23 per cent in April 2021 and 6.97 per cent in March 2022. Food inflation also rose to 8.38 per cent in April, from 1.96 per cent in the year-ago month and 7.68 per cent in the preceding month.
Inflation in cereals and products in April jumped to a 21-month-high level; vegetables at a 17-month high; and spices at a 17-month high. Consumer food price inflation rose to 8.38 per cent, which is a 17-month high.
Inflation Vs Growth, Globally
The report said the persistence of high inflation is forcing countervailing monetary policy action at a time when supporting the economic recovery should have been assigned priority. During 2022 so far (up to May 24, 2022), more than 40 central banks across AEs and EMEs have raised policy interest rates and/or scaled back liquidity. Policy trade-offs are becoming increasingly complex going forward and tail risks, including stagfl ation, loom large in several countries.
“The future path of growth will be conditioned by addressing supply-side bottlenecks, calibrating monetary policy to bring inflation within the target while supporting growth and targeted fiscal policy support to aggregate demand, especially by boosting capital spending,” the report said.
It also said capacity utilisation in several industries is moving closer to normal levels, although rising input costs and persisting supply bottlenecks, as for instance in semiconductors for the automobile sector, may impede or delay a fuller recovery.
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