English Article

How to tackle Food Inflation and how not to

Fear mongering over wheat production must not push the government towards an export ban, especially on cereals the prices of which are at an alltime high.

The RBI team led by Governor Shaktikanta Das must be complimented for raising the repo rate by 40 basis points (bps) and the cash reserve ratio (CRR) by 50 bps with a view to tame inflation. High inflation is always an implicit tax on the poor and those who keep their savings in banks. The real value of their savings gets depreciated with every round of inflation as interest on deposits is often far below the inflation rate. So, controlling inflation is an important mandate of the RBI. The question that arises is: Will the increases in the repo rate and CRR control inflation, especially food inflation? The short answer is, “not yet”. Our assessment of the situation is that the RBI has been behind the curve by at least by 4-to 5 months, and its optimism in controlling inflation in the earlier meetings of the Monetary Policy Committee was somewhat misplaced. If the RBI has to make up for lost time, it will have to repeat this feat of raising repo rates and CRR by at least three more times in this fiscal year (FY23) to mop up excess liquidity in the system. Even then, it may be difficult to rein in food inflation, which is surging faster than the overall consumer price index (CPI). The reason for this is simple. Food prices globally are scaling new peaks as per the FAO’s food price index. The disruptions caused by the pandemic and now the Russia-Ukraine war are contributing to this escalation in food prices. India cannot remain insulated from this phenomenon. While on the one hand, it has opened opportunities for Indian farm exports, on the other hand, it has posed challenges as import prices of edible oils and fertilisers surge.