Effects of Monetary Policy on Food Inequality in India

Food insecurity and hunger are significant components of standard poverty measures and continue to be pressing issues in emerging market economies. However, these issues have received less attention in examining the indirect effects of monetary policy. In this paper, we study the impact of monetary policy on food inequality in India. Specifically, we examine the impact of monetary policy shocks on relative food prices and the distribution of food consumption, focusing on subsistence food consumption of poor households. Using the most recent household survey data, we estimate the dynamic effects of monetary policy shocks on relative food prices and the distribution of food consumption in rural and urban India using a dynamic common factor model. Our results show that expansionary monetary policy shocks increase the relative price of food, reduce the food consumption of poor households, and raise food consumption inequality across households. Increase in the relative price of food following a monetary expansion disproportionately hurts the poor relative to the non-poor. This is the first study to provide evidence of a 'food price channel' in monetary policy transmission to understand food inequality. This study holds important policy implications for Indian central bankers and policymakers as well as for those in similar emerging market economies.