High food prices in India threaten inflation outlook, say rate panel members

By Swati Bhat

MUMBAI (Reuters) – Rising food prices have caused India's inflation rate to fall short of the central bank's four percent target, forcing the Monetary Policy Committee (MPC) to maintain its hawkish stance, minutes of the Reserve Bank of India's August meeting showed.

“Persistent food inflation is adding resilience to overall inflation,” Governor Shaktikanta Das said in minutes released on Thursday.

“A permanent adjustment of inflation to the target of 4% is still a long way off.”

Indian retail inflation fell to a five-year low of 3.54% in July as food inflation eased from previous highs due to a base effect, while core inflation continued to oscillate around record lows of around 3%.

“Core inflation may have just bottomed out,” Das said.

As widely expected, the RBI left its key interest rate unchanged in early August and continued to focus on reducing inflation, even as other major central banks were prepared to ease their policies due to volatility in global markets.

Four out of six MPC members voted in favour of the rate decision, while Jayanth Varma and Ashima Goyal voted for a 25 basis point rate cut and a change of stance to neutral.

“Overall, India’s growth is robust but still below its potential,” Goyal wrote in the minutes.

Varma said looking ahead, the current repo rate of 6.5 percent translates into a real interest rate of 2.1 percent, well above what is needed to push inflation toward the 4 percent target.

“It is true that disinflation is long-lasting and therefore restrictive monetary policy will have to be maintained for several more quarters. But a real interest rate of 1.5 percent is restrictive enough in this environment,” Varma wrote.

Deputy Governor Michael Patra said persistently rising prices reflect too much demand chasing too little supply – even if it is a supply deficit that sets the price spiral in motion. The task of monetary policy is to adjust demand conditions to supply conditions.

“Potential production is currently rising faster than before the pandemic. Nevertheless, a positive production gap has opened up – actual production exceeds potential production. This justifies a vigilant monitoring of aggregate demand developments,” Patra wrote.

The RBI expects India's economy to grow 7.2% in the current fiscal year ending March 2025, slowing from 8.2% last year. The second quarter GDP will be released on August 30.

(Reporting by Swati Bhat, additional reporting by Siddhi Nayak, editing by Eileen Soreng)