Slowdown in soaring vegetable prices helps ease India inflation rate to 6.2 per cent

MUMBAI, India – India’s inflation eased in December as vegetable prices fell from the previous month, the government said Wednesday.

The fall in the inflation rate to 6.2 per cent could persuade the central bank to hold off from an interest rate hike this month, though the inflation is still far above its target of 4-5 per cent.

The latest inflation rate was down from 7.5 per cent in November.

Prices for vegetables dropped by 29.7 per cent in December from November, led by onions and potatoes, which had soared in cost in previous months. Still, vegetables overall cost 57.3 per cent more in December than they did a year earlier.

Fuel power costs were up 0.8 per cent over the previous month and the prices for manufactured products were flat.

Soaring inflation coupled with flagging economic growth has posed a dilemma for the Reserve Bank of India’s monetary policy, which is constrained in trying to spur the economy by lowering interest rates because it also wants to battle inflation — traditionally done by keeping interest rates high.

Higher prices for food and fuel, in particular, hurt the hundreds of millions of poor Indians living on less than $2 per day because they spend roughly half of their income on the staple items.

The central bank’s chief, Raghuram Rajan, has made battling inflation a priority since taking office last year and has hiked the key interest rate twice since September to its current 7.75 per cent.

However, Rajan last month decided to keep the interest rate unchanged, saying he believed food inflation would come down soon because of a favourable monsoon season, a prediction that seems to have been correct.

Food inflation in India is partially driven by harvests and also an inefficient distribution system that results in some 30 per cent of produce spoiling before reaching markets.

Rajan has been under pressure from some corners to freeze or even cut interest rates to try to revive stalling growth in India’s wider economy. Asia’s third-largest economy expanded by 4.8 per cent in the July-September quarter, far below the 8 per cent rate the country averaged a few years ago.

Some business leaders have argued that lower interest rates encourage businesses to borrow and invest and consumers to spend.

The Reserve Bank’s next policy meeting is Jan. 28.