The sharp rise in vegetable prices in June has halted the process of disinflation to the target of 4 per cent, the Reserve Bank of India’s (RBI) state of the economy report said, while reiterating that the fight against inflation is far from over.
“Every silver lining has a cloud,” the report said, alluding to food inflation amid bright growth prospects.
“Data for June 2024 showed that consumer price inflation ticked up after three consecutive months of moderation as a broad flare-up in vegetable prices halted the overall disinflation that had been underway,” the report, which is authored by RBI staffers, including deputy governor Michael Patra, said. The report does not reflect the view of the central bank, it has clarified.
Headline inflation, as measured by year-on-year (Y-o-Y) changes in the all-India consumer price index, edged up to 5.1 per cent in June 2024 from 4.8 per cent in May.
Food inflation (Y-o-Y) firmed up to 8.4 per cent in June from 7.9 per cent in May as the positive price momentum more than offset a favourable base effect. Core inflation remained unchanged at 3.1 per cent in June.
“…disinflation has been grudging and uneven and headline inflation remains closer to 5 per cent than to the target of 4 per cent in its latest readings in spite of historically low readings on core inflation and sustained deflation in fuel prices,” the report said.
The report further said that the argument that food price shocks are transitory does not seem to be borne out by the actual experience over the past year – ‘too long a period for a shock to be termed as transitory’.
Commenting that food prices are clearly dominating the behaviour of headline inflation and households’ inflation expectations, the report warned that the accumulation of food price pressures threatens the outlook for inflation in the form of spillovers to wages, rents, and expectations.
“The MPC of the RBI has committed to align inflation durably to the target. Till that is achieved, the recent halting declines in inflation readings have to be regarded as work still in progress,” it said.
It cautioned that monetary policy in the pursuit of short-run gains of increasing growth can end up losing credibility, unhinging inflation expectations, and triggering a surge in inflation.
The report said that given the high uncertainty shrouding the inflation outlook, it is prudent to eschew the temptation of time inconsistency and stay the course on the straight and narrow path of aligning inflation with the target of 4 per cent.
At the same time, it said that this does not imply that inflation should reach 4 per cent and stay there before monetary policy considers a change in stance.
“…instead, based on a careful evaluation of the balance of risks, an enduring movement towards the target should provide signals to forward-looking monetary policy to respond,” the report added.
Commenting on the banking sector, the report indicated that the share of low-cost current and saving deposits has largely bottomed out in the 39-40 per cent range in a steady decline from about 44 per cent in 2021-22.
“This is likely to squeeze banks’ net margins going forward and prompt re-pricing of deposit books.”
It said banks have been impelled to increase the mobilisation of funds through certificates of deposits (CDs) in June ahead of the quarter-end.
First Published: Jul 18 2024 | 7:48 PM IST
