Inflation in India is becoming sticky. In August 2026, CPI inflation rose to 4.82%, while food inflation climbed to 5.95%. WPI inflation neared double digits at 9.92%, showing that price pressures are no longer limited to consumers and are spreading through production chains, which will eventually be passed on to consumers. Though CPI remains within the RBI's inflation threshold, inflation's headstrong turn suggests it may soon breach the limit, and the RBI may opt to raise interest rates.
This is not merely a monetary problem. India’s food supply remains vulnerable to monsoons, weak storage, fragmented markets, external shocks due to fuel dependency and, most importantly, speculation. The RBI cannot solve these structural constraints by raising interest rates or by using monetary policy instruments.
The solution to this structural problem lies in the hands of the government. The government must invest in logistics, irrigation and competitive agricultural markets (agriculture reforms), along with bringing down the dependency on imports to plug the problem of imported inflation and shocks.
However, at this point in time, India needs to fix the problem using a mix of long-term strategies with short-term ad hoc solutions. Rising food inflation, mainly the prices of vegetables, needs immediate attention. Better supply management is a better solution than that of aggressive interest rate increases.
It must be noted that monetary policy transmission is slow and cannot improve agricultural produce, while a solution is needed immediately. The government needs to release buffer stocks of wheat, pulses and rice in the market along with relaxing import duties and administrative restrictions on edible oils, pulses and other commodities. Perishable food items should move faster from surplus to deficit states while the government strictly monitors hoarding of essential food items. Otherwise, in the next few months, inflation expectations will harden, real incomes will suffer, and growth will become more unequal. So the RBI should anchor inflation expectations with the purpose of preventing second-round effects of rising inflation rather than trying to defeat supply shocks with rate hikes.
The policy window for the government as well as the RBI is narrowing.
However, at this point in time, India needs to fix the problem using a mix of long-term strategies with short-term ad hoc solutions. Rising food inflation, mainly the prices of vegetables, needs immediate attention. Better supply management is a better solution than that of aggressive interest rate increases.
It must be noted that monetary policy transmission is slow and cannot improve agricultural produce, while a solution is needed immediately. The government needs to release buffer stocks of wheat, pulses and rice in the market along with relaxing import duties and administrative restrictions on edible oils, pulses and other commodities. Perishable food items should move faster from surplus to deficit states while the government strictly monitors hoarding of essential food items. Otherwise, in the next few months, inflation expectations will harden, real incomes will suffer, and growth will become more unequal. So the RBI should anchor inflation expectations with the purpose of preventing second-round effects of rising inflation rather than trying to defeat supply shocks with rate hikes.
The policy window for the government as well as the RBI is narrowing.
Rajeev Upadhyay
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