 "Shaktikanta Das, Shaktikanta, RBI Governor")
With this high share of food in the consumption basket, food inflation pressures cannot be ignored, said Shaktikanta Das. (Photo: PTI)
Food inflation “pressures” cannot be ignored as the Monetary Policy Committee (MPC) “targets” headline inflation, said Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday, speaking after the domestic rate-setting panel kept its key interest rate unchanged on Thursday.
The Economic Survey on July 22 suggested exploring whether the inflation targeting framework of the central bank should exclude food. “Continuing food price shocks slowed the process of disinflation in Q1 FY25. There is also considerable divergence between headline and core inflation. This has brought to the fore how much importance the MPC should give to food inflation. Our target is headline inflation, where food inflation has a weight of 46 per cent. With this high share of food in the consumption basket, food inflation pressures cannot be ignored,” Das said.
“The MPC may look through high food inflation if it is transitory. But in an environment of persistently high food inflation, as we are experiencing now, the MPC cannot afford to do so,” said Das, adding that the MPC has to remain vigilant to prevent spillovers or second-round effects from persistent food inflation to preserve the gains made in monetary policy credibility.
The public understands inflation more in terms of food inflation than other components of headline inflation. “Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably,” he said.
The Economic Survey noted that hardships from rising food prices for poor and low-income consumers could be addressed through direct benefit transfers or coupons for specified purchases valid for designated periods.
India’s chief economic adviser, V Anantha Nageswaran, has said that monetary policy is a short-run macro aggregate demand management tool, which cannot manage aggregate supply shocks, and food shocks are predominantly supply shocks. “Also, in a way, it is a bit unfair to burden the central bank with controlling inflation when it contains a component that is not under its control,” he had said.
Governor Das explained the rationale behind the MPC’s vigilance on food inflation, saying high food inflation affects household inflation expectations, which have a significant impact on the future trajectory of inflation. Persistently high food inflation and unanchored inflation expectations, if they materialise, could spill over to core inflation through a pick-up in wages due to cost of living considerations.
“This, in turn, could be passed on by firms in the form of higher prices for services as well as goods, especially in a scenario of strong aggregate demand. These behavioural changes can result in overall inflation becoming sticky even after food inflation recedes,” he said.
“Overall, the inflation trajectory has been moderating, and we do expect it to moderate, but the pace of moderation has been uneven and slow. So, we need to be watchful to ensure that we move closer to 4 per cent on a durable basis. That indeed would be the best contribution that monetary policy can make to support economic growth in the country,” Das said.
The RBI has projected CPI inflation of 4.5 per cent for 2024-25, with Q2 at 4.4 per cent; Q3 at 4.7 per cent; and Q4 at 4.3 per cent. CPI inflation for Q1FY26 is projected at 4.4 per cent.
First Published: Aug 08 2024 | 11:32 AM IST
