RBI won’t waver in its focus on taming retail inflation
The decision of the Reserve Bank of India’s (RBI) Monetary Policy Committee (MPC) to leave the policy rate unchanged in the last meeting was on expected lines. RBI also maintained its stance of ‘withdrawal of accommodation,’ as it is committed to bringing down consumer price index (CPI)-based inflation to its 4% target on a durable basis. RBI governor Shaktikanta Das highlighted that healthy economic growth has given RBI room to unwaveringly focus on price stability.
While CPI inflation has moderated to 5.1% in the last two months, it remains above RBI’s 4% goal. Core inflation (excluding food and fuel) has slipped below 4%, with continued disinflation in the services sector. The main concern for the central bank is persistently high food inflation—7.4% in February.
Specifically, very high inflation in items of daily consumption like vegetables (30%) and pulses (19%) could result in upward pressure on household inflationary expectations. As per the latest RBI survey, the household perception of current inflation moderated to 8.1% in January 2024 from 8.9% in July 2023. But one-year-ahead inflation expectations remain high at 10%.
With a normal monsoon expected this year, we can expect further moderation in food inflation. However, caution is warranted, given that in the last few years, we have seen increased climate risks, with an adverse impact of that on domestic and global food prices. India’s Meteorological Department has warned of more heat waves than usual this year.
This increases upside risks for food inflation, specifically for vegetables and fruits. Low water reservoir levels are another concern. Hence, a normal monsoon with good spatial distribution will be very critical for a moderation in food inflation.
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