Prices and Inflation: Understanding the Dynamics

Introduction

• Global inflation: Declined to 5.7% in 2024 from its peak of 8.7% in 2022 (IMF). 
• Core inflation: Reached its lowest point in a decade.

Domestic Inflation

• India's Retail inflation: Reduced from 5.4% in FY24 to 4.9% in FY25 (April-December 2024).
• Reason for decline in retail inflation: Decrease in core inflation by 0.9 percentage points between FY24 and FY25, largely driven by core services inflation and decrease in fuel price inflation.
  • Decline in core inflation was largely driven by core services inflation, which was lower than core goods inflation. 

Food Inflation

• Over the past two years, India's food inflation rate has remained firm. 
  • Extreme weather conditions (cyclones, heavy rains, hailstorms, droughts, heatwaves etc.) impacts vegetable production (mainly onion and tomato), and supply chains, thereby affecting retail prices.
• Consumer Food Price Index (CFPI) has increased from 7.5% in FY24 to 8.4% in FY25, primarily driven by a few food items particularly vegetables and pulses. 
  • By excluding Tomato, Onion and Potato (TOP) - most price-sensitive vegetables- from CPI basket, average food inflation rate in FY25 was 6.5%.
• Administrative measures to control food inflation
  • Cereals: Stock limits on wheat; Offloaded wheat and rice from central pool under Open Market Sale Scheme; Sale of wheat flour and rice under Bharat brand.
  • Pulses: Sale of chana dal, moong dal and masur dal under Bharat brand; Imposition of Stock limits on tur and desi chana; Allowed duty-free import of desi chana, tur, urad, masur and yellow peas.
  • Vegetables: Buffer Stock of Onion (4.7 lakh MT of rabi onion procured under Price Stabilisation Fund); Subsidised sale of Onion and Tomato. 

Outlook

• Consumer Price Inflation (CPI): RBI and IMF projected India's CPI will gradually align with the target in FY26.
• Inflation Rate: IMF has projected an inflation rate of 4.4% in FY25 and 4.1% in FY26 for India.
• Headline inflation: RBI expects headline inflation to be 4.2% in FY26, if there is normal monsoon and no further external or policy shocks.

Ways to ensure long-term price stability

• Developing climate-resilient crop varieties, thus enhancing yield and reducing crop damage. 
• Farmers should receive training on best practices, use of high-yield and disease-resistant seed varieties to improve agricultural practices in major growing regions for pulses, tomatoes, and onions.
• Implementing robust data collection and analysis systems in various tiers of government to monitor prices, stocks, storage and processing facilities, and make informed policy decisions.