However, veggies are given to brief spells of shortages. Most are short-duration crops or victims of rains and transport dislocations. Most vegetable prices have already fallen in November and are expected to fall further in the winter months.
Core inflation, which does not include the volatile food and fuel prices, has climbed to 3.7% compared to 3% at the start of 2024. Economists expect even retail inflation at a high 5.3% to 5.5% in November too, far from the RBI’s mandated 4% target.
READ: The cookie crumbles, thanks to biting inflation
In the near term, cereal prices may make RBI’s task tough. The central bank has said on numerous occasions that it wants the CPI to move towards 4% in a sustainable manner.
Retail inflation is too high to come down too fast
The current trend shows that inflation may not cool down even until February, forcing the RBI to refrain from cutting interest rates anytime soon. The bigger worry for RBI is the likelihood of getting caught between higher-than-expected inflation and lower-than-expected growth.
The about 3% growth in industrial output between July and September, the slowdown in the pace of GST collections in August, and the sub-par corporate earnings in the second quarter, all indicate that the the second-quarter GDP may well come in at 6.5% to 6.6%, far below RBI’s forecast of 6.8%.
The central bank may in its December policy lower its FY25 GDP forecast to below the coveted 7% mark. But in the face of inflation still ruling far above its 4% target, the central bank may be hard-pressed to defend a rate cut and the lack of it.
Weaker rupee also poses a hurdle on the way to a rate cut
The other big imponderable for RBI is the currency market. A well-regarded central bank principle is not to cut rates
when the currency is weakening.
While a December cut is excluded, it is possible that in the first week of February when the RBI-MPC meets again, President Trump who would have been in the White House for just 2 weeks may announce a bunch of tariff hikes or tax cuts for US companies. Both moves can keep further weaken emerging market currencies.
A consolation, as Goldman Sachs helpfully points out, is that inflation is a tad less than 4% if one leaves out the spike in vegetable prices.
Why food prices never fall substantially in India?
The bigger worry for the RBI will be cereals (up 6.94%) and edible oils (up 9.5%). Niti Aayog’s Ramesh Chand, arguably one of India’s finest economists, told CNBCTV18 that the formula to arrive at minimum support prices (MSP) for crops has an inbuilt structural bias to push up prices.
India arrives at MSP by including all the costs that go into growing a crop, including family labour with a 50% mark-up.
Chand argues that elsewhere in the world prices of agricultural products go up during deficient years and then come down during surplus years. However, in India, food prices never fall because the MSP can never come down. He fears we may wake up only when our farm exports become uncompetitive.
However, 2025 may also bring some disinflationary factors:
1. The price of crude didn’t go over $78-80 per barrel in the past quarter despite, strong US data, Chinese stimulus and an accentuation in the Israel-Palestine war. Chances are, with Trump encouraging more drilling, crude may turn out to be a disinflationary item for India.
2. Tariffs on Chinese exports to the U.S. can also mean that China dumps more goods, even at below cost, in the global markets. Slower Chinese growth can also have a disinflationary impact on global commodities.
3. Brokerages see Trump’s tariffs, if imposed in a ham-handed fashion, to hurt US growth as well. This too can cause some disinflation later in the year.
In short, while a December cut is clearly off the table, 2025 can be a year of very different macros and surely, much uncertainty.
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