Focus on avoiding spillovers of food inflation to core

MUMBAI: While inflation is gradually trending down, its pace is slow and uneven. Durable alignment of inflation to the RBI’s target of 4 per cent is still some distance away.

Spillovers of food inflation to core has to be avoided, said Shaktikanta Das governor Reserve Bank of India (RBI) while voting for a status quo in policy rates and stance earlier this month showed the minutes of the Monetary Policy Committee (MPC) meeting released on Thursday.

According to Das, food inflation pressures are showing little signs of abatement in the near-term while household inflation expectations are picking up. “Monetary policy has to remain vigilant to potential spillovers of food price pressures to the core components. This is critical for the last mile of disinflation and anchoring of inflation expectations.”

“The best contribution that monetary policy can make for sustainable growth is to maintain price stability,” he added.

India’s inflation declined to a 59-month low of 3.5 percent in July compared with 5.1 percent in June as a favourable base helped contain pressures, according to data released on August 12. Consumer Price Index inflation (CPI) had touched 7.4 percent in July 2023.

The MPC on August 8, decided by a majority of 4 out of 6 members voted to make no changes in interest rates to ensure that inflation progressively aligns to the target, while supporting economic growth.

The RBI has hiked policy rates by 250 basis points between May 2022 and Feb.2023, since then it has kept the repo rate unchanged at 6.5 per cent.

Das countered the objection of two external members, Jayanth Varma and Ashima Goyal, that high real interest rates are resulting in India growing lower than its potential.

“At a time when durable disinflation to the target is still a work in progress, the issue of equilibrium natural interest rate is premature,” said Das.

“Policy making in real world cannot be on abstract, theoretical construct which is unobservable and time varying. Any justification for easing based on high real rates can be misleading,” Das said.