Tuesday, 29 Apr, 2025
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While monetary policy plays a key role, structural reforms are essential to mitigate the inflationary vulnerabilities. Strategic investments in agricultural infrastructure, including storage and supply chain improvements, could help stabilise food prices and reduce volatility
India’s inflation rate dropped to 5.22 per cent in December 2024, marking a four-month low and providing temporary relief for consumers and policymakers alike. This fall, down from 5.38 per cent in November, is a promising development within the Reserve Bank of India’s (RBI) tolerance range of 2-6 per cent. Yet, a closer examination reveals challenges that could sustain inflationary pressures in the medium term.
The moderation in inflation was largely due to cooling food prices, which softened to 8.39 per cent from 9.04 per cent in November. Housing costs also eased slightly, while deflation in fuel prices moderated. Notably, retail prices registered a sharp monthly dip of 0.52 per cent, the largest in more than a year, signalling some relief for households.
Food inflation is particularly critical in India, given its significant weight in the consumer price index (CPI). A bumper harvest and improved supply chains likely contributed to the easing of food prices. However, food price volatility, driven by unpredictable monsoon patterns and global commodity market fluctuations, remains a persistent risk.
While the recent easing is encouraging, core inflation—which excludes volatile food and fuel prices—remains sticky. This stickiness shows enduring price pressures in services and manufacturing, supported by wage growth and robust domestic demand. Moreover, supply-side bottlenecks in key sectors such as transportation and energy continue to add to the inflationary mix.
A Reuters poll suggests inflation is unlikely to return to the central bank’s medium-term target of 4 per cent before the second half of 2026. This highlights the structural nature of the country’s inflationary challenges, where transient factors such as food prices mask deeper, more persistent price pressures.
For the RBI, the latest data provides room to maintain a pause on rate hikes, particularly with growth concerns looming. However, policymakers must remain vigilant. Any global oil price surge, geopolitical instability, or climate-induced disruptions could quickly reverse the current trend.
Beyond monetary policy, structural reforms are critical to address the inflationary vulnerabilities. Investments in agricultural infrastructure, storage, and supply chains can help mitigate food price volatility. Similarly, policies to enhance energy efficiency and diversify India’s energy basket could reduce the economy’s exposure to global fuel price swings.
India’s inflation has eased for now, but the underlying risks remain unresolved. Policymakers must use this temporary respite to roll out reforms that address systemic drivers of inflation. Without such measures, the path to price stability will remain fraught, complicating the RBI’s dual mandate of controlling inflation and supporting growth.
High food inflation, slowing economic growth, and a depreciating rupee are creating a perfect storm for the county’s policymakers. The RBI faces a formidable challenge in managing these conflicting pressures, with any misstep potentially destabilising both
The rupee’s recent slide compounds the policy dilemma. A weaker currency increases the cost of imports, particularly crude oil, which has a cascading effect on inflation. Simultaneously, a depreciating rupee strains the current account balance and could trigger capital outflows if rate cuts diminish India’s yield appeal to global investors.
India’s economic outlook demands a careful balancing act from the RBI and other policymakers. While immediate actions might provide temporary relief, sustainable solutions will require a longer-term focus on structural challenges. The key lies in calibrated measures that safeguard macroeconomic stability while supporting a fragile growth recovery.
