RBI released the Mid Quarter Monetary Policy review last week, and it reminded me of the mid year review done about a year ago. By now you know that the Repo rate has been increased to 8.25%, and that the RBI is still worried about the high inflation, and has raised the rates to continue with their stance earlier.
You probably also remember the troika that was talked about in the last review that could adversely affect the growth or inflation situation.
- Bad Monsoon
- Commodity Bubble or Collapse
- Eurozone debt crisis assuming a full blown proportion
What’s interesting is that out of these three factors – bad monsoons are the only ones that have spared us. We have had a good monsoon, and record food production is expected this year, but at the same time food inflation is close to double digits (as the report puts it).
What’s more, we are not coming off a low base, these numbers have been high for quite some time, and food prices have just gone north for quite some time now.
Why aren’t prices moderating then? Perhaps reading something from the second quarter review LAST year will throw some light on it.
Further, notwithstanding some moderation, food price inflation has remained persistently elevated for over a year now, reflecting in part the structural demand-supply mismatches in several commodities â€“ besides protein sources, oilseeds and vegetables also show this pattern. Given the changing consumption patterns and as yet inadequate supply response, food price inflation is becoming increasingly structural in nature. Further, even as non-food manufacturing inflation has indeed moderated, it still remains above its medium-term trend.
Now look at an excerpt from one year later:
Food inflation is at near-double digit levels, despite normal monsoons, underlining the fact that it is being driven by structural demand- supply imbalances and cannot be dismissed as a temporary phenomenon.
Isn’t it incredible?
Imagine what would happen if the monsoons were bad.
Till last year food inflation was the number one worry, but that has changed into more “generalized inflation” this year, and this is not helping anyone.
Unfortunately, the global recovery has sputtered, the situation in Europe is still very unclear, and crude prices rose (before they fell) making the situation worse this year.
But the food situation is depressing because it is so well documented, and has been talked about for such a long time, and still no progress have been made on it. I wonder if we will still be seeing the same thing one year down the road.