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Informist, Monday, Aug 19, 2024

 

--RBI paper: Danger of food inflation becoming generalised has risen

--RBI paper: Calling food price shocks transitory becoming untenable

--RBI paper: Core CPI may run out of control if monetary policy softens 

--RBI paper: Headline CPI may run out of control if policy softens 

--RBI paper: Disinflationary policy offsetting food CPI spillovers 

--RBI paper: Need cautious monetary policy if high food CPI persists 

--RBI paper: Data shows food inflation spillover to non-food basket

 

NEW DELHI – India's headline inflation as well as core inflation may run out of control if monetary policy softens, the Reserve Bank of India's staff said in a paper today, adding that food price shocks have been imposing upside pressures on core inflation throughout these years, but this has been offset by disinflationary monetary policy.

 

"Monetary policy is the only active disinflationary agent in the economy. Going forward, therefore, if food price pressures persist and continue to spill over, a cautious monetary policy approach is warranted," the paper said.

 

In the latest meeting, the central bank's Monetary Policy Committee 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.

 

The RBI also retained its headline inflation forecast for the current financial year that started in April at 4.5%, while it increased 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.

 

"Should this disinflationary force recede, upward pressures on core and headline inflation could get magnified and may run out of control, especially with aggregate demand picking up alongside cost-push risks looming in the wake of geopolitical tensions," the paper said on 'Are Food Prices Spilling Over?' in RBI's bulletin for August.

 

The views expressed in the paper, authored by RBI officials, including Deputy Governor Michael Patra, do not necessarily reflect those of the central bank. 

 

The staff paper also added that the conventional treatment of food price shocks as transitory in the setting of monetary policy is increasingly becoming untenable.

 

India's annual inflation rate based on the Consumer Price Index fell to a 59-month low of 3.54% in July from a four-month high of 5.08% in June, latest data shows. This is the first time CPI inflation has fallen below the RBI's target of 4% since September 2019.

 

This does not warrant a cheer, as the fall in the headline print was mainly because of a statistical effect of a high base. The base effect was such that had the overall index remained unchanged in July from the previous month, headline inflation would have fallen to 2.09%.

 

Sequentially, the overall index rose 1.4% in July, the biggest month-on-month rise since July 2023. The month-on-month rise in July was mainly because of a 2.8% jump in the food price index. Food inflation, however, fell to 5.42% in July from 9.36% in June due to the statistical impact of a high base.

 

The rise in food prices was led by a 14.1% month-on-month jump in vegetables, particularly tomato, onion, and potato. The tomato index surged 41.8% on month in July and the onion index was up 20.5% from the previous month. The potato index rose 16.6% in July from the previous month. Apart from vegetables, prices of pulses also rose in July, up 1.3% from the previous month.

 

Core inflation, which strips out fuel and food items, rose to 3.4% in July from a record low of 3.1% in June. This is the first time core inflation has risen in 20 months. The rise in core inflation was likely because of an increase in telecom tariffs last month and a rise in gold prices.

 

Even as CPI inflation fell below 4% in July, it is expected to rise above the RBI's target in August and September. 

 

Empirical evidence points to spillovers (of food inflation) to non-food components, which are being offset by disinflationary monetary policy, the staff paper added.

 

RBI Governor Shaktikanta Das had raised a word of caution earlier in the month 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 had said.

 

"With spillovers to costs, service charges and output prices, the danger of food inflation surfacing as a more generalised phenomenon has increased," the staff paper reiterated today.

 

Against this backdrop of sticky food inflation, economists see the panel unlikely cutting rates before December, according to a post-monetary policy poll by Informist.

 

Only three of the 22 economists polled expect rate cuts to start in October. Four see the cuts starting in October or December. A majority 15 out of 22 respondents expect rate cuts to start in December or later.

 

While seven respondents expect the cuts to start in December, four see the first cut coming in February, and one each in December or February and December or beyond. Two of the respondents — Equirus Securities and YES Bank — do not see any rate cut in the current financial year ending March.  End

 

Reported by Priyasmita Dutta

Edited by Ashish Shirke

 

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