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Informist, Thursday, Aug 8, 2024

 

--RBI Das: Inflation broadly on declining trajectory
--RBI Das: Flexible inflation targetting framework has worked well
--RBI Das: Monetary policy must be resolute to bring CPI to 4% durably
--RBI Das: RBI sees FY25 CPI inflation 4.5% vs 4.5?rlier
--RBI Das: Jul-Sep CPI inflation seen 4.4% vs 3.8?rlier
--RBI Das: Oct-Dec CPI inflation seen 4.7% vs 4.6?rlier
--RBI Das: Jan-Mar CPI inflation seen 4.3% vs 4.5?rlier
--RBI Das: Apr-Jun FY26 CPI inflation seen 4.4%

--RBI Das: Food component of inflation remains stubborn

--RBI Das: Policy must continue to be disinflationary
--RBI Das: Focussed on inflation with an aim to support growth
--RBI Das: Important for policy to maintain close vigil on inflation
--RBI Das: Controlling inflation is MPC's best contribution to growth
--RBI Das: Inflation receding grudgingly across major economies
--RBI Das: Risks to inflation are evenly balanced
--RBI Das: Considerable divergence between headline, core CPI
--RBI Das: Persistently high food inflation can spill over to core CPI
--RBI Das: Unanchored inflation expectations can spill over to core CPI
--RBI Das: See Jul-Sep inflation base effects reverse in Oct-Dec

--RBI Das: Expected CPI easing Q2 due to base effect may reverse in Q3
--RBI Das: Food CPI contributed to 75% of rise in headline CPI May-Jun
--RBI Das: High inflation pressure persisted in other food items also
--RBI Das: High food price momentum may have continued in July
--RBI Das: High base effects in Jul may push down CPI in mo
--RBI Das: Relief in food inflation seen due to monsoon progress
--RBI Das: Relief in food inflation seen due to good kharif sowing
--RBI Das: Continuing food price shocks slowed disinflation progress Q1
--RBI Das: To monitor milk price revision, mobile tariff hike impact
--RBI Das: Our target is headline CPI, with food at 46% weightage
--RBI Das: Food inflation pressures can't be ignored
--RBI Das: Public understands inflation as food inflation, not others
--RBI Das: Can't, shouldn't get complacent because of core CPI fall
--RBI Das: High food inflation affects household inflation expectation
--RBI Das: Unanchored household CPI view could lead core CPI spillovers
--RBI Das: Overall CPI may become sticky even if food CPI recedes
--RBI Das: Pace of CPI moderation uneven, slow
--RBI Das: MPC must prevent second round effects of food inflation
--RBI Das: MPC cannot overlook high food inflation if not transitory
--RBI Das: Overall inflation trajectory moderating
--RBI Das: Must ensure CPI falls, sustains at 4% target

--RBI Das: Inflation has moderated from earlier high levels

--RBI Das: We have still distance to cover to align CPI to 4% aim

--RBI Das: Inflation moderating, pace of disinflation is slow, uneven

--RBI Das: Will await NSO decision on CPI weights

--RBI Das: Govt taking steps to deal with supply-side issues
--RBI Das: Interacting with govt on supply-side measures on inflation

--RBI Das: Monitoring impact of flood situation on inflation
--RBI Das: Impact of flood situation on inflation may be temporary

 

NEW DELHI – The Reserve Bank of India today retained its headline inflation forecast for the current financial year started April at 4.5%, while it hiked the projection for the current quarter ending September by 60 basis points to 4.4%, stating that there is a divergence between headline and core inflation, which has brought to the fore how much importance should the monetary policy committee give to food inflation that remains stubborn. 

 

"The monetary policy committee may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the monetary policy committee cannot afford to do so," Governor Shaktikanta Das said while presenting the third bi-monthly monetary policy for 2024-25 (Apr-Mar). "It has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility."

 

"The public at large understand inflation in terms of food inflation more than the other components in the basket of headline inflation, therefore, we cannot and should not become complacent because core inflation has fallen considerably," he said. "Food inflation pressures cannot be ignored," Das said.

 

The June CPI inflation print of 5.08% reversed a five-month declining trend in headline inflation and was the first above 5% print since February. Headline inflation for June mainly rose because of a surge in food prices, particularly of vegetables. Food inflation rose to a six-month high of 9.36% in June, and the food price index increased 3.2% from the previous month.

 

The rise in food prices was led by a 14.2% month-on-month jump in prices of vegetables, particularly tomato, onion, and potato. The tomato index surged 48.7% on month in June and the onion index was up 24.2% from the previous month. The potato index rose 12.2% in June from May.

 

With the high weightage of the food component in the basket of CPI inflation, it contributed more than 75% of the headline inflation in May-Jun and vegetable prices particularly contributed nearly 35%, Das said. High inflation persisted across other major food items also, he added.

 

"The progress towards our goal of price stability has been uneven due to large and persistent supply side shocks, especially in food items," Das said.

 

In fact, the Economic Survey for 2023-24 compiled by Chief Economic Adviser to the government V. Anantha Nageswaran, had said India's inflation targeting framework should consider excluding food inflation as higher food prices are, more often, not demand-induced but supply-induced. Short-run monetary policy tools are meant to counteract price pressures arising out of excess aggregate demand growth, it said, adding that it is "worth exploring whether India's inflation targeting framework should target the inflation rate excluding food".

 

On a question regarding this at the post-policy press conference, Das said the National Statistical Office evaluated the different weightages given to each component based on 2011-12 prices, which is a "long-time back", and that a new review was pending but was put on the backburner due to the COVID-19 pandemic. The NSO is currently evaluating new data and will accordingly take a call, Das said. 

 

"High food price momentum is likely to have continued in July also. A large favourable base effect may, however, push inflation downwards in July," the governor said. "The impact of revision in milk prices and mobile tariffs also need to be monitored," he said, but also mentioned that "global food prices showed signs of easing in July, after registering increases since March 2024."

On the other hand, core inflation, which strips out fuel and food items, whose prices can sometimes be volatile, remained at 3.1% for the second consecutive month in June. This is the lowest core inflation in the current CPI series. 

 

The RBI's medium target for CPI inflation is 4%, with the lower and upper end of the target being 2% and 6%, respectively. Last time CPI inflation was at the central bank's target was four years ago, in Jul-Sep of 2019-20. This flexible inflation targeting framework has worked well in maintaining macroeconomic stability even during times of extreme stress, Das said.

 

The RBI's Monetary Policy Committee today kept the policy repo rate unchanged at 6.50% and stuck to its stance of withdrawal of accommodation to ensure that inflation progressively aligns to the target, while supporting growth. "This approach would be net positive for sustained high growth."

The central bank today retained their GDP growth projection for the current fiscal at 7.2%.

 

Das said the monetary policy committee judged that it is important for the policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof. "It must continue to be disinflationary and resolute in its commitment to aligning inflation to the target of 4.0% on a durable basis."

 

Though the softening in core inflation continues to be broad-based, Das raised a word of caution that persistently high food inflation and unanchored inflation expectations--if they materialise--could lead to spillovers to core inflation through pick-up in wages on 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," he said. 

 

Rise in prices of goods and services, which may impact demand, can trigger behavioural changes, then can result in overall inflation becoming sticky, even if food inflation recedes, the governor added.

 

For Oct-Dec, the central bank today raised the inflation projection by 10 basis points to 4.7% while lowering the view for Jan-Mar by 20 basis points to 4.3%. "The expected moderation in headline inflation during the second quarter of 2024-25 on account of favourable base effects is likely to reverse in the third quarter," Das said.

 

The central bank also projected the CPI inflation for Apr-Jun of 2025-26 to be at 4.4%. "The risks are evenly balanced," Das said.

 

In the previous policy, Das had said that food inflation, which has been the pain point for many months now, will determine the inflation outlook for the full year. "High food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation," he said today. 

 

Though in every policy statement, he mentions a few factors which may ease food inflation, the list seems to be increasingly shrinking as we move forward. Today, he mentioned only three points--pick-up in the south-west monsoon, healthy progress in sowing and buffer stocks of cereals continuing to be above the norms.

 

After a slow start, the southwest monsoon rainfall has picked up across the country in the last two weeks with parts of northwest, central and south peninsular India recording heavy rainfall. So far this monsoon season, the country has received 484.0 mm rainfall, 4?ove the long-period average. Rainfall so far has been normal to excess in 77% of the total area in the country, and deficient in 23%. Of the 36 meteorological subdivisions in the country, 27 have received normal to excess rainfall so far, while nine have seen deficient showers.

On the other hand, farmers across the country have sown kharif crops over 90.5 mln ha as of Friday, up nearly 3% from a year ago, data from the farm ministry showed. According to the latest available data, the government's wheat and rice buffer stocks --two primary food grains--were above norms though the levels were lower than the year-ago period.

 

While the monsoon augurs well for inflation management, floods in a few states raised questions about a spike in food inflation. Das, at the press conference, said the central bank is monitoring the impact of floods on inflation and if there is an impact at all, it may be temporary.

 

Over 380 people have died and dozens more are missing after heavy rain led to a series of landslides in Kerala recently. Rescue operations have also been hampered by poor weather conditions and the destruction of roads and bridges. Recently, flash floods and cloudbursts have caused huge damage in several areas of Uttarakhand and Himachal Pradesh as well.

 

Additionally, the government is taking steps to deal with supply-side issues, Das said at the press conference, adding that the central bank is also interacting with the government to take steps as and when required to ease inflation. 

 

In the global context, the governor said that "inflation is receding grudgingly across major economies." Owing to the varying outlooks for growth and inflation across countries, monetary policy is showing signs of divergence across jurisdictions. Several central banks are cautiously moving towards policy pivots through forward guidance and rate cuts; at the same time, there has been tightening by a few central banks. 

 

The US Federal Open Market Committee kept the federal funds target range unchanged at 5.25-5.50% in its July meeting. This was the eighth successive meeting in which the rate-setting panel of the US Federal Reserve kept the rates unaltered. While the decision was not a surprise, the US Federal Reserve has changed its tone, which may reflect a softer monetary policy outlook. The rate-setting panel said it does not see it appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2%.

 

On the other hand, in a move away from its long-running ultra-loose policy, the Bank of Japan raised its benchmark interest rate to "around 0.25%" from its previous range of 0-0.1% late last month. 

 

In his conclusion, the central bank governor said inflation has been trending downward, and the monetary policy committee has made progress in achieving price stability, but have more distance to cover. "We recognise the challenges along the way, but we have to be patient to finish the job at hand," Das said.  End

 

Reported by Priyasmita Dutta

Edited by Vandana Hingorani

 

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