In July, the monthly print in inflation for tomato, onion and potato came in at 62.1%, 24.6% and 18% respectively — and the year-on-year increase in inflation for vegetables is 29.3%. For cereals, inflation increased to 8.8% in June from 8.6% in April; for fruits, inflation increased to 7.2% in June from 5.2% in April; and for pulses inflation printed at 16.1% in June, recording 13 consecutive months of inflation in double digits. Since November 2023, food inflation has been over 8%, a trend that has surprised both the government and the RBI.

This February, the RBI, in a paper, wondered whether food inflation was showing core-like characteristics, meaning behaviour that is more like core inflation, which is less volatile compared to food or energy inflation. Prolonged seasons of climate-related erratic weather — heatwave in 2022, La Nina conditions for three years in a row, unseasonal rainfall in March 2023 followed by a delayed onset of the monsoon, heavy rainfall in July 2023 and dry conditions in August 2023, persisting El Nino conditions and another heatwave in 2024 — have affected agricultural yields and supply chains, pushing food inflation higher.

The paper - co-written by deputy governor Michael Debabrata Patra - cautioned the monetary policy committee “to be conscious of the dangers of overkill in reactions to a transitory food price shock and also of the pitfalls of benign neglect of looking through persistent food price shocks.” Additionally, it warned about persistently high food inflation feeding into households’ inflation expectations, and thus affecting demand.

One afternoon in July, as heavy rain lashed the village of Parra in northern Goa, Randhir, a construction site supervisor, settled on the concrete floor of his rented and yellowly lit tiny room and wondered about his finances: income, savings and spending. A migrant worker originally from West Bengal’s climate-ravaged Sundarbans delta, Randhir decided to cull some planned spending — renovating the rain-battered house walls of his family home; taking out a loan for a Candy Blazing Red Hero HF Deluxe bike for his son.

“Prices are so high. My wife suggested we would do better to save up for our younger son’s education. Who knows how high food prices will be in future,” he said over a phone call.

“Households are constrained in their spending abilities owing to higher inflation. The challenge is to [gauge] whether this is getting more firmly ingrained in household inflation expectations - I don't know if this is clear cut yet. Certainly, if higher inflation persists for a long time, this is a potential risk,” Jeremy Zook, head of sovereign ratings for Asia Pacific at Fitch Ratings, said.

And the RBI’s monetary stance at the moment, Zook said, is relatively appropriate given the inflation dynamics.

“Growth is not robust”: Is RBI making a trade-off between inflation and growth?

“Food inflation pressures cannot be ignored,” Das told reporters during the press conference. He said that robust growth in GDP enabled the monetary policy to focus unambiguously on inflation, and reiterated that growth remained strong. In the last three years, economic growth has averaged about 8.3%.

However, this year, in the April and June monetary policy meeting, Jayanth R. Varma, a member of the central bank’s monetary policy committee, voted for cutting interest rates. Varma noted that high interest rates for “unwarrantedly long will lead to a growth sacrifice” in fiscal years 2025 and 2026.

Ashima Goyal, another member, was blunt in pointing out the trade-offs between growth and inflation. “Growth is below potential and may slow further since consumption remains weak. Transfers from a small percentage cannot give prosperity to a billion people. Reducing unemployment is important for political and financial stability. Without a rise in productive employment, aggressive redistribution becomes more likely and may provoke a flight of wealth taking India back to the stagnant seventies,” she noted in her statement and voted for a quarter percentage point cut in interest rates.

“Growth is not robust in the sense that it is generating employment or there are better wage conditions or [high] domestic consumption. The argument that growth is robust shows a deep lack of understanding of the phenomenon of asset bubbles and how it affects aggregate gross domestic product,” Jayati Ghosh, economist and professor at the University of Massachusetts Amherst, said.

The reasons behind runaway food inflation are issues such as climate change, higher prices for agricultural inputs and declining agricultural yields, according to Ghosh, who stressed that monetary policy isn’t the right tool to fight food inflation. “The critical point is inflation concentrated in food; it is not widespread. And even with food, inflation is not led by demand because we know that aggregate consumption is down,” Ghosh said. “This is cost-push inflation. And the relevant tool to fight it is not interest rates.”

“Food inflation is not necessarily driven by demand factors but significantly more by supply factors. Whether monetary policy itself can have an impact on the supply side and the agricultural sector is not clear. If food inflation is judged to be more persistent, then it would lead to higher rates for longer so as to constrain demand elsewhere in the economy,” Zook said.

Ghosh said that food inflation is not driven by demand, and in such a scenario the central bank cannot use monetary policy to bring inflation down. On the other hand, food inflation should be tackled by the government using fiscal policy, by increasing investments in agricultural supply chains, for instance. “It is not a question of inflation versus growth — and it happens only if you believe in Philip's curve situation, which doesn't apply to developing economies,” she said.

The Phillip’s curve is a historical inverse relationship between inflation and unemployment, meaning if more people have jobs, there will be more money in the economy and hence high inflation. “If you seek to control inflation via monetary policy, you probably can but at a huge cost to the real economy - inflation will come down with high interest rates but so will people's real incomes,” Ghosh said. “You are likely to weaken economic activity further.”

“What worries me in general is that the government has not understood the nature of the current inflationary period. In the same way that it has not understood the nature of the current employment crisis,” Ghosh said.

Zook pointed out that core inflation - stripped of food and fuel inflation - has trended down and remains well contained at the moment. A similar sentiment was shared by Goyal in her statement to the monetary policy committee meeting in June: “Core inflation has been below 4% since December 2023. Volatile commodity prices, El Nino and heat waves have not been able to reverse the approach to the target.”

Ghosh called on the RBI to correctly identify the reasons behind the rise in food prices. “Is it oligopolistic behaviour? Is it supply chain issues? is it the devaluation of the currency? Check out all these factors, assess the relative importance and see which of these you can use policy instruments on,” she said.

Back in Parra, Randhir wondered whether he would have to cut back on essential expenditure if his wages rose as much as prices for items such as food and fuel. “I would have taken a loan to get my son a bike; it would save him time for his studies,” he said, as rain fell in the village, abolishing work at the construction site for the day; a day when he had to tell his son over a phone call that he won’t get the Candy Blazing Red Hero HF Deluxe bike this year.

Rohit Inani is a New Delhi-based reporter. He writes about business, economy and political economy.