Reserve Bank of India (RBI) Governor Shaktikanta Das has highlighted the critical importance of closely monitoring the initial impact of food prices on inflation, according to the minutes of the Monetary Policy Committee’s (MPC) August meeting. The central bank’s unwavering commitment to controlling inflation and mitigating potential risks associated with fluctuations in food prices is evident.
While recognizing that recent shocks in vegetable prices are expected to have a short-lived effect, Das suggests that the monetary policy should consider overlooking the initial impact of these transient shocks on headline inflation. He emphasizes the necessity for policymakers to be prepared to anticipate and counteract any potential secondary effects of food price shocks.
Das also points out that the correction in vegetable prices is projected to occur swiftly with the advent of fresh crops. However, he underscores the presence of risks to both food and overall inflation due to factors such as El Nino conditions, volatile global food prices, and uneven monsoon distribution. These factors demand vigilant monitoring to ensure economic stability.
In July, retail inflation in India surged to 7.44%, marking the highest level in 15 months, primarily due to significant price hikes in vegetables and cereals.
As per the minutes, the MPC, comprising three members from the central bank and three external members, unanimously decided to maintain the repo rate at 6.50%.
RBI Deputy Governor Michael Patra also highlights the potential risk to the inflation outlook arising from excessive liquidity in the banking system. He emphasizes the need for the RBI to prioritize the withdrawal of excess liquidity, as it directly threatens the RBI/MPC’s commitment to align India’s inflation with the target and poses potential risks to financial stability.
External MPC member Jayant Varma expresses confidence that the current repo rate level is sufficiently high to consistently bring inflation below the upper tolerance band and guide it towards the middle of the band. His view aligns with the RBI’s comprehensive strategy for inflation management.
