Why in the News?

The decline in food prices is seen as a major reason for the drop in inflation. After two rate cuts by the RBI, inflation is expected to stay below 4% in the coming months, which might lead to another rate cut of 50 basis points.

Why have food prices been a major factor in the decline of retail inflation?

• Sharp Decline in Vegetable Prices: Vegetable prices saw a significant drop of 7.04% year-on-year in March 2025, compared to a small increase of 1.07% in February. This sharp fall in vegetable prices helped lower overall food inflation.
• Lower Pulses Prices: Pulses prices fell by 2.73% in March, after a smaller 0.35% decrease in February, contributing to reduced food inflation.
• Moderation in Overall Food Inflation: Food inflation in March 2025 decreased to 2.69% from 3.75% in February. This marked the lowest food inflation since November 2021, indicating a significant reduction in food price pressures.
• Improved Farm Output: The moderation in food prices is partly due to better farm output, which led to a more stable supply of food items, especially vegetables and pulses, easing inflationary pressures.
• Government and Central Bank Support: The government’s expectations for above-average monsoon rains in 2025 are likely to boost farm output further, maintaining lower food prices, which will continue to moderate overall inflation.

How did the Reserve Bank of India respond to the easing inflation trend?

• Second Consecutive Rate Cut: On April 9, 2025, the RBI reduced the key policy repo rate by 25 basis points to 6.00%, marking its second consecutive rate cut aimed at stimulating economic growth amid moderating inflation.
• ​Shift to Accommodative Stance: The RBI changed its monetary policy stance from “neutral” to “accommodative,” signaling a more supportive approach to economic growth while maintaining vigilance over inflation.
• ​Revised Inflation Forecast: The central bank projected the Consumer Price Index (CPI) inflation to average 4% for the fiscal year 2025–26, down from the previous forecast of 4.2%, reflecting improved inflation dynamics.
• ​Lowered GDP Growth Estimate: The RBI revised its GDP growth forecast for the fiscal year to 6.5%, down from 6.7%, acknowledging the challenges posed by global uncertainties and trade tensions.

What risks did the RBI highlight that could impact the inflation outlook?

• Global Market Uncertainties: The RBI noted that ongoing global uncertainties, such as trade tensions (like the U.S.-China trade war), could disrupt supply chains and impact inflationary pressures in India. Eg, any further escalation in global trade disputes could lead to higher import costs.
• Adverse Weather Conditions: The RBI pointed out that unpredictable weather events, such as unseasonal rains or droughts, could lead to food supply disruptions and push up food prices, affecting overall inflation. Eg, a poor monsoon could lead to shortages in key agricultural products.
• Rising Global Commodity Prices: The central bank warned that fluctuations in global commodity prices, including oil and metals, could lead to higher domestic prices, contributing to inflation. Eg, a rise in global crude oil prices could increase transportation and fuel costs in India.
• Supply Chain Disruptions: The RBI highlighted the risk of supply-side bottlenecks, especially due to external factors like geopolitical conflicts or supply chain disruptions caused by the COVID-19 pandemic. These could raise prices for imported goods and affect domestic inflation. Eg, disruptions in global electronics supply chains could lead to higher prices for tech products.
• Core Inflation Pressures: The RBI also noted that core inflation, which excludes volatile items like food and fuel, remained persistently high at 4.1%, signaling that inflationary pressures could be more entrenched in the economy, which poses a risk to the inflation outlook. Eg, rising demand for services could contribute to sustained core inflation.

Way forward: 

• Strengthen Supply Chain Resilience: The government and RBI should work together to improve supply chain infrastructure and reduce vulnerabilities to global disruptions. This includes addressing logistical bottlenecks, improving domestic production capabilities, and diversifying import sources to mitigate the impact of geopolitical tensions and climate events.
• Focus on Sustainable Agricultural Practices: To ensure stable food prices, long-term investments in sustainable farming techniques, irrigation systems, and better farm management practices are crucial. This will not only help stabilize food prices but also contribute to higher farm output and lower volatility in food inflation.

Mains PYQ:

[UPSC 2024] What are the causes of persistent high food inflation in India? Comment on the effectiveness of the monetary policy of the RBI to control this type of inflation.

Linkage: Food inflation and the RBI’s role in controlling it, which is a key aspect of the scenario described in the article.

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