India’s economic story has always been a complex tapestry of growth and inflation. Recent reports of a moderation in consumer price inflation to a four-month low of 4.8 per cent in October come as a breath of fresh air for the Reserve Bank of India (RBI) and the Centre. This decline, bringing inflation closer to the RBI’s 4 per cent medium-term target, is undoubtedly a positive sign. Volatile food prices, which constitute approximately half of the consumer price index (CPI) basket, have likely played a crucial role in this dip. The spikes witnessed in July and August appear to be easing, offering temporary relief. But it is essential to keep an eye on onion prices that continue to surge.

Onions, a staple in Indian cuisine, hold immense sway over household budgets and can disrupt the delicate balance of inflation. The forecast for further declining inflation is fuelled by the expectation of on-going moderation in food inflation. This optimism is well-founded, as food and beverage inflation is projected to fall below 6 per cent. Such a trend, if sustained, could provide much-needed respite in the fight against inflation. However, economists caution that any sustained increase in onion prices might complicate this path. Despite the relief brought by lower inflation rates, it is still some distance away from the RBI’s target. The central bank is expected to maintain its key policy rate at 6.50 per cent until at least the end of June 2024, followed by a modest 25-basis-point cut in the subsequent quarter. It is a clear indication that the RBI remains cautious and vigilant.

The prospect of headline inflation returning to the RBI’s mid-point target only in the second half of 2025 is a stark reminder of the enduring challenge ahead. Inflation in India is expected to have a bumpy journey in the coming months, characterised by base effects and fluctuations in vegetable prices. These factors could potentially push the headline inflation back above 5 per cent this quarter and keep it in that territory into early 2024. The central bank’s conservative approach to the inflation outlook seems wise. It is inclined to extend its policy pause before considering any change in stance. This strategy reflects the careful balance the RBI needs to strike between controlling inflation and promoting economic growth. In essence, the inflation story is one of cautious optimism tinged with uncertainty and the path to achieving the RBI’s 4 per cent medium-term target is a long one. India’s economy is on a tightrope, and taming inflation is fraught with challenges. The recent dip in inflation is a positive sign but it is only one in a series of steps required to achieve long-term economic stability. The RBI and the Centre must remain vigilant and adaptable to ensure a smoother journey along this economic tight-rope.