N4S:

This article explains the causes and control of food inflation in India clearly and simply. UPSC often asks questions that require linking causes of inflation with monetary policy measures, as seen in the 2024 question on food inflation and RBI’s policy effectiveness. Aspirants usually falter by not connecting theory with current data or by missing the nuances between supply-side and demand-side factors. They also struggle to analyze the RBI’s role realistically rather than just listing policies. This article helps by breaking down complex themes like “Role played by Food Prices in Reducing Retail Inflation” with up-to-date examples (e.g., vegetable prices fell by 7.04% in March 2025), making it easier to grasp the direct impact on inflation. It also clarifies the RBI’s responses under different scenarios (like rate cuts and liquidity management) and their limitations, helping aspirants think critically rather than memorize. The special feature of this article is its clear linking of macroeconomic terms to real-world numbers and RBI decisions, making abstract concepts practical and exam-relevant. By focusing on specific subheads like “RBI’s policy responses in various scenarios” and “The Link Between Food Prices and Inflation,” it guides aspirants to answer mains questions with structured, evidence-backed arguments, avoiding common pitfalls. Overall, it is a concise yet comprehensive resource that bridges textbook knowledge with current affairs smoothly.

This article explores the causes and control of food inflation in India by linking economic concepts with current trends. UPSC often frames such topics by combining theory with real-world application, as seen in the 2024 question on food inflation and the RBI’s policy effectiveness. Many aspirants struggle to connect supply-side and demand-side factors or evaluate the RBI’s role beyond surface-level policy tools.

The article addresses these challenges using recent data, such as the 7.04 percent drop in vegetable prices in March 2025, to illustrate inflation patterns. It also examines how the RBI responds in different scenarios—through interest rate adjustments or liquidity measures—and where those responses fall short. With focused subheads and grounded analysis, it helps aspirants write structured, evidence-based answers.

PYQ ANCHORING

GS 3: 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. [2024]

MICROTHEME: MONETARY POLICY

India’s retail inflation has been on a steady decline, primarily driven by the sharp drop in food prices, especially vegetables, eggs, and pulses. Following two rate cuts by the Reserve Bank of India (RBI), inflation is expected to stay below 4% in the coming months, with a possible further rate cut of 50 basis points.

India’s Retail Inflation in March 2025

Retail Inflation Rate: In March 2025, India’s retail inflation eased to 3.34%, the lowest since August 2019.
Comparison to Previous Month: This marked a drop from February’s 3.61%, continuing the downward trend in inflation.
Contributors to Decline: The main drivers of this decline were a significant reduction in food prices, particularly vegetables, eggs, and pulses. Vegetable prices, for example, fell by 7.04% year-on-year in March.

Role played by Food Prices in Reducing Retail Inflation

Vegetable Prices: Vegetable prices dropped significantly by 7.04% in March, compared to a small increase of 1.07% in February. This drastic fall helped reduce overall food inflation.
Pulses Prices: Pulses prices also saw a decline of 2.73% in March, after a smaller decrease of 0.35% in February, further contributing to lower food inflation.
Overall Food Inflation: Food inflation dropped to 2.69% in March 2025 from 3.75% in February, marking the lowest since November 2021.
Improved Farm Output: Better farm output, particularly in vegetables and pulses, stabilized food supplies, further easing inflationary pressures.

RBI’s Response to Easing Inflation

Second Rate Cut: On April 9, 2025, the RBI reduced the policy repo rate by 25 basis points to 6.00%, its second consecutive rate cut.
Shift to Accommodative Stance: The RBI moved its monetary policy stance from “neutral” to “accommodative,” signaling a supportive approach to economic growth while keeping inflation in check.
Revised Inflation Forecast: The RBI revised its inflation forecast to 4% for FY 2025-26, down from the earlier 4.2%, reflecting improved inflation dynamics.
Revised GDP Growth Estimate: The RBI lowered its GDP growth estimate to 6.5% for the fiscal year, down from 6.7%, citing global uncertainties and trade tensions.

Risks Highlighted by RBI Affecting Inflation Outlook

Global Market Uncertainties: Ongoing global uncertainties, including trade tensions, could disrupt supply chains and lead to higher import costs. For example, a worsening of U.S.-China trade relations could escalate costs.
Adverse Weather Conditions: Unpredictable weather, such as unseasonal rains or droughts, could affect agricultural supply and push up food prices.
Rising Global Commodity Prices: Fluctuations in global commodity prices, including oil, could drive up domestic prices. For instance, rising crude oil prices could increase fuel and transportation costs.
Supply Chain Disruptions: Geopolitical tensions or supply chain disruptions (e.g., from the COVID-19 pandemic) could lead to higher prices for imported goods, impacting inflation.
Core Inflation Pressures: Core inflation (excluding volatile food and fuel) remained high at 4.1%, signaling persistent inflationary pressures in the economy.

The Link Between Food Prices and Inflation

Food prices play a pivotal role in shaping the inflationary trends in an economy. As essential items for daily consumption, changes in food prices directly influence the cost of living. When food prices rise, inflation tends to increase, and when food prices decline, inflation can ease. Here’s how food prices are intricately linked to inflation:

Factor	Explanation	Example
Direct Contribution to CPI	Food prices are a significant component of the Consumer Price Index (CPI), which is used to measure inflation. A rise in food prices directly increases CPI.	A 10% rise in vegetable prices increases the CPI.
Impact on Household Budgets	Higher food prices lead to higher household spending on basic items, reducing disposable income and contributing to overall inflation.	Increased spending on food reduces the ability to spend on other goods and services.
Food as a Staple	Staple foods (e.g., wheat, rice, vegetables) are essential for survival. A rise in their prices can push up inflation, especially in developing countries.	A price hike in wheat can cause inflationary pressure on food items like bread.
Inflation Expectations	Persistent food price increases can create inflation expectations. When consumers expect higher prices, they may demand higher wages, contributing to further inflation.	If vegetable prices consistently rise, workers may demand higher wages, fueling inflation.
Government Response	Rising food prices often prompt central banks to adjust monetary policies, such as increasing interest rates to control inflation.	RBI may hike interest rates to curb inflation caused by rising food prices.
Supply Chain Disruptions	Disruptions in the supply of food (e.g., due to weather, transportation issues) can cause short-term spikes in food prices, which can drive inflation temporarily.	A poor monsoon leading to a spike in vegetable prices may temporarily raise inflation.

RBI’s policy responses in various scenarios

Broad Theme	RBI’s Monetary Policy Response	Effectiveness
1. Supply-Side Constraints	• Interest Rate Adjustments: To reduce inflationary pressures, the RBI can increase interest rates, which can dampen overall demand, helping to alleviate food price inflation. (Example: Repo Rate Hike)	Moderate: While rate hikes can reduce demand, they do not directly address supply-side constraints like poor weather, crop failures, or logistical issues.
	• Liquidity Management: Through tools like Cash Reserve Ratio (CRR), the RBI can control the money supply, limiting excess liquidity that could lead to inflationary pressures. (Example: CRR adjustment)	Moderate: While liquidity management helps control demand, it does not directly resolve supply issues like crop shortages or inefficient agricultural practices.
2. Inefficiencies in the Supply Chain	• Credit Control: The RBI’s policy of providing easy access to credit for agriculture can help farmers and businesses improve infrastructure and reduce supply chain inefficiencies. (Example: Targeted Credit)	Low: Credit control can aid in agricultural growth but does not directly address logistical inefficiencies, poor storage, or high food wastage in the supply chain.
	• Priority Sector Lending: By mandating a certain percentage of loans be given to agriculture and rural sectors, the RBI can encourage improvements in rural infrastructure and logistics. (Example: PSL targets)	Moderate: This encourages investment in agriculture but does not solve the systemic issues in the supply chain, such as poor transportation and lack of cold storage.
3. Demand-Supply Imbalances	• Inflation Targeting: The RBI focuses on a specific inflation target (4% +/- 2%) to control both food and general inflation, which can help stabilize prices in times of demand-supply imbalances. (Example: Repo Rate)	Moderate: This helps manage demand-side inflation, but its effectiveness in resolving supply-side imbalances is limited.
	• Forward Guidance: By providing signals about future monetary policy, the RBI can manage public expectations and help stabilize food price inflation during periods of imbalance. (Example: Policy Announcements)	Moderate: Forward guidance can help curb inflation expectations, but it doesn’t directly address structural imbalances or fluctuating demand due to changing consumption patterns.
4. Global & External Factors	• Exchange Rate Management: The RBI stabilizes the exchange rate through market interventions, helping to control import-related food price inflation, especially for edible oils and other imports. (Example: Forex reserves)	Moderate: Stabilizing the currency helps mitigate imported food inflation but does not resolve issues like global supply disruptions or rising international food prices.
	• Currency Stabilization: The RBI’s efforts to intervene in the forex market to stabilize the rupee also help manage the cost of importing food, reducing the impact of price fluctuations on imported food items. (Example: Currency intervention)	Moderate: While currency stabilization is crucial, it does not prevent external shocks such as natural disasters or geopolitical tensions that influence global food prices.
5. Rising Input Costs	• Monetary Tightening: The RBI increases interest rates to reduce demand for inputs, such as fuel or fertilizers, which can help curb cost-push inflation. (Example: Repo rate hike)	Effective: Monetary tightening can help control inflationary pressures on input costs. However, it doesn’t directly affect global prices for inputs like oil or fertilizers.
	• Liquidity Management: RBI uses tools like the CRR to absorb excess liquidity, reducing inflationary pressures on input costs. (Example: CRR changes)	Moderate: Helps control demand but doesn’t directly affect global price increases for raw materials or essential agricultural inputs.
6. Policy-Level Issues	• Inflation Targeting Framework: RBI follows an inflation-targeting framework, aiming to keep inflation in check through policy rate adjustments. (Example: Repo rate hikes)	Moderate: While inflation targeting helps stabilize inflation, it does not directly address policy-level issues like government intervention in food exports or import bans.
	• Coordination with Fiscal Authorities: The RBI works with the government to tackle food inflation, though its primary role is monetary policy. (Example: Coordination in 2021 food inflation measures)	Moderate: Coordination between RBI and fiscal authorities is beneficial, but RBI alone cannot solve structural issues in food policy, such as pricing or export restrictions.

Way Forward:

Enhance Agricultural Productivity: Invest in sustainable farming practices, modern irrigation systems, and efficient crop management to ensure consistent food supply and mitigate price volatility.
Improve Supply Chain Infrastructure: Strengthen logistics networks to reduce food wastage, improve distribution efficiency, and minimize the impact of disruptions on food prices.
Promote Price Stability Mechanisms: Implement strategic reserves and price stabilization programs for essential food items, helping to smooth out short-term fluctuations in food prices.
Increase Digital Integration in Agriculture: Use technology to improve market access for farmers, provide real-time price data, and enable better forecasting of food production, allowing better price predictions and planning.
Strengthen Weather Forecasting & Disaster Management: Improve weather forecasting systems and develop contingency plans for adverse weather conditions to safeguard food production and prevent price spikes.

#BACK2BASICS: INFLATION

Inflation refers to the overall increase in the prices of goods and services, which results in a decrease in people’s purchasing power. In simple terms, when inflation rises, without a corresponding increase in income, you are able to buy fewer goods and services for the same amount of money, or you have to pay more for the same items.

A “rising” inflation rate means that the pace at which prices are rising is itself increasing. For example, if inflation was 1% in March, 2% in April, 4% in May, and 7% in June, this shows that the rate of price increases is accelerating over time.

Causes of Inflation

Demand-Pull Inflation:
This type of inflation occurs when demand for goods and services exceeds supply. When demand is high, consumers are willing to pay more, leading to an overall increase in prices.
Cost-Push Inflation:
Cost-push inflation arises from rising production costs, such as higher wages, increased raw material costs, or disruptions in the supply chain. These higher costs are passed on to consumers in the form of higher prices.
Wage-Price Inflation:
This inflation occurs when there is a cycle between wages and prices. Workers demand higher wages, and businesses, in turn, raise prices to cover the increased labor costs. This can create a feedback loop where rising wages lead to rising prices, which in turn lead to further wage demands.

What are the Different Indices Through Which Food Inflation is Measured in India?

Consumer Price Index (CPI):
The CPI measures the rate at which the prices of goods and services that consumers buy for personal use increase over time. It includes food, clothing, housing, transportation, medical care, and more. The CPI is categorized into four types:
- CPI for Industrial Workers (IW)
- CPI for Agricultural Labourers (AL)
- CPI for Rural Labourers (RL)
- CPI for Urban Non-Manual Employees (UNME)
Consumer Food Price Inflation (CFPI):
CFPI is a part of the broader CPI and tracks the price changes of food items commonly consumed by households, including cereals, vegetables, fruits, dairy products, and meat. The Reserve Bank of India uses the CPI-Combined (CPI-C) for monitoring food inflation.
Wholesale Price Index (WPI):
WPI tracks the price changes of goods sold in bulk by wholesalers to businesses. It focuses only on goods (not services) and provides insight into the supply and demand dynamics of industries, manufacturing, and construction. The WPI includes:
- Primary Articles (22.62% of WPI) such as food items like cereals, pulses, vegetables, fruits, and dairy products.
- Non-Food Articles, including items like oil seeds, minerals, and crude petroleum.

What are Various Government Initiatives to Control Food Inflation?

Subsidized Commodities:
The government is distributing subsidized vegetables such as onions and tomatoes through its network and releasing stocks of wheat and sugar to stabilize prices.
Reduction in Import Duty:
To boost domestic production, the government is encouraging pulse cultivation and reducing import duties on certain pulses to enhance local availability.
Export Bans:
To ensure ample domestic supply, the government has imposed bans on wheat exports since May 2022 and on broken rice exports since September 2022, aimed at lowering domestic prices.
Ban on Stockpiling:
Regulations have been introduced to limit stockpiling. For example, traders, millers, wholesalers, and retail chains can hold no more than 3,000 tonnes of wheat, while smaller retailers and shops can hold only 10 tonnes to prevent excessive stockpiling and price hikes.
Operation Greens:
This initiative focuses on stabilizing the supply of Tomato, Onion, and Potato (TOP) crops year-round across the country to minimize price fluctuations and stabilize food inflation.
Floor Prices:
To manage onion prices during supply shortages, the government has set a minimum export price (MEP) of $800 per tonne (₹67 per kg) for onions from October 29 to December 31, 2023, in response to rising prices due to delayed kharif onion arrivals.

MOCK DROP: India’s retail inflation is declining due to falling food prices and RBI’s rate cuts. Critically examine whether rate cuts and reduced food prices can sustainably keep inflation under control. What challenges could affect this trend in the near future?