Preventing food inflation from spilling over into the core economy

MUMBAI: Inflation is gradually declining, but the pace is slow and uneven. A sustained adjustment of inflation to the RBI target of 4 percent is still a long way off.

Food inflation must be prevented from spilling over into core markets, said Reserve Bank of India (RBI) Governor Shaktikanta Das as he voted for a status quo on policy rates and stance earlier this month, according to the minutes of the Monetary Policy Committee (MPC) meeting released on Thursday.

According to Das, there are few signs of easing in food inflation pressures in the near term, while household inflation expectations are rising. “Monetary policy needs to remain vigilant to avoid any potential impact of food price pressures on core components. This is critical for the last mile of disinflation and anchoring inflation expectations.”

“The best contribution that monetary policy can make to sustainable growth is to maintain price stability,” he added.

According to data released on August 12, inflation in India fell to a 59-month low of 3.5 percent in July, from 5.1 percent in June, as a benign base helped contain pressures. Consumer Price Index (CPI) inflation had reached 7.4 percent in July 2023.

On August 8, the MPC decided by a majority of 4 out of 6 votes not to make any changes to interest rates in order to ensure that inflation gradually approaches the target while supporting economic growth.

The RBI raised the key interest rate by 250 basis points between May 2022 and February 2023 and has left the repo rate unchanged at 6.5 percent since then.

This contradicted the objection of two external members, Jayanth Varma and Ashima Goyal, that high real interest rates were causing India to underperform its potential.

“At a time when sustained disinflation to the target level is not yet complete, the question of a natural equilibrium interest rate is premature,” Das said.

“Real-world policy-making cannot be based on abstract, theoretical constructs that are unobservable and time-varying. Any justification for monetary easing based on high real interest rates can be misleading,” Das said.