The Reserve Bank of India (RBI) on Monday in its August Bulletin warranted a cautious monetary policy approach if food price pressures persist.
A report titled ‘Are Food Prices Spilling Over’ authored by Deputy Governor MD Patra and others said, “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.”
It said that the conventional treatment of food price perturbations as transitory in the setting of monetary policy is increasingly becoming untenable.
The inelasticity of the demand for food to price shocks makes food inflation persistence all the more worrying, it reads.
“Monetary policy must be disinflationary to quell these price pressures in order to achieve its mandate of price stability and thereby retain credibility,” it added.
Food inflation becomes endemic in 2020s
The RBI report highlighted that the high food inflation has become endemic in the 2020s.
In a staggering 57% of months between June 2020 and June 2024, food inflation was at or above 6%, with around 6 out of 12 food sub-groups experiencing 6% and above inflation for 50%, it said.
Barring sugar and confectionary, all other food sub-groups experienced high food inflation in more than one-third of the months considered, it noted.
The report noted that the conventional treatment of food price perturbations as transitory in the setting of monetary policy is increasingly becoming untenable.
“A large part of this increase in persistence is driven by the secular upward drift in food inflation expectations,” it added.
What Governor Das had said on food inflation?
A couple of weeks back, while announcing the Monetary Policy Committee delibrations, RBI Governor Shaktikanta Das had said that the central bank can not ignore food inflation while formulating monetary policy.
He said food inflation, with a weight of around 46% in the CPI basket, contributed to more than 75% of headline inflation in May and June. Vegetable prices increased sharply and contributed about 35% to inflation in June.
Also Read: RBI MPC meet: Policy rate unchanged at 6.5%, inflation forecast at 4.5%
“High inflation pressures persisted across other major food items also. On the other hand, the softening in core inflation continues to be broad-based, with core services inflation touching a new low in the current CPI series during May-June 2024,” the governor said.
He also said that the MPC 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 MPC cannot afford to do so.
Monetary Policy Committee 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, he emphasized.
