Recent food price surges are unlikely to translate into generalised inflation because while the government is spending to contain food prices, it is also keeping a close watch on its fiscal deficit, Ashima Goyal, external member of the Monetary Policy Committee, told Bhaskar Dutta. Edited excerpts:
Are you confident that the current food price shocks will not translate into more generalised inflation?
In the 2007-13 inflation episode, second round pass-through of high food inflation along with large fiscal deficits and government spending in rural areas led to a rise in real rural wages. We do not see these conditions now. The government is spending to cap food prices, while ensuring deficits do not rise. Such policies contribute to preventing spillover effects from food price shocks.
You said in the minutes that the sectoral inflation structure supports a fall in core inflation. What is the timeframe for core inflation to approach the 4% mark?
First, we have to see the current rise in headline reverse, before we can talk of 4%. But wholesale price inflation is negative and should also soften some consumer prices in time.
Threats posed by excess liquidity to inflation have found repeated mention in the minutes. Given that liquidity decisions influence market rates and are being used to tackle inflation, should liquidity management also fall under the purview of the MPC?
In an inflation targeting regime, liquidity is endogenous. Short-term liquidity is supposed to adjust, to maintain short rates around the repo rate mandated by the MPC. If it is unable to do so, then durable liquidity must be adjusted. The MPC cannot be involved in daily liquidity operations but the UK MPC gives overall guidance on liquidity management.
You have pointed out that despite a pickup in monsoon in July, precipitation remains uneven. August has seen weak rainfall. What is your current prognosis for food prices?
The El Nino is being countered by the Indian Ocean Dipole, and the East seems to be making up for an earlier shortfall. We need to wait and watch for a couple of months. But Indian agriculture has diversified its crops and become more resilient.
You mentioned the need for more well-functioning agricultural markets as well as the fact that oil companies are in a position now to reduce prices. What more needs to be done on the supply side?
There are some long and some short-term actions. In the long term, Indian agriculture has to become less monsoon dependent through reviving local water bodies, and yet reduce water use through appropriate crop choices.
