For the eighth time in a row, the RBI’s Monetary Policy Committee (MPC) decided to maintain the benchmark repo rate at 6.50%, citing concerns that “elevated food inflation could derail” its efforts to maintain long-term price stability. Governor Shaktikanta Das cited the threat that persistent increases in food prices represent to the broader disinflation path as justification for the MPC’s stance. Just two months prior, Das had spoken of the “elephant” of inflation starting its journey back to the jungle following a walkabout. The Consumer Food Price Index, which measures food inflation, increased to a provisional 8.7% in April from 8.52% in March. According to Crisil’s food plate costs, recent indicators indicate that price increases sparked by a spike in tomato, onion, and potato prices may have accelerated even further in May.
According to the June 8 projection by the Centre for Monitoring Indian Economy (CMIE), headline retail inflation probably rose by 31 basis points to 5.14% last month, virtually entirely due to a 40 basis point acceleration in food price increases to 9.1%.
The MPC flagged the difficulties it faces in accomplishing this goal as growing unfavourable climate events trigger supply shocks that make it extremely difficult to predict the trajectory of food prices. The MPC voted by a 4-2 majority to “remain focused on withdrawal of accommodation to ensure that inflation progressively aligns to the target” of 4%. The increase in the price of fruits and vegetables was attributed by the CMIE to the heatwaves that occurred last month.
In addition, the MPC is well aware that rising prices for industrial metals could undermine the deflationary trend in core inflation, in addition to the threat posed by food prices that continue to soar due to the nation’s reservoirs’ dangerously low water storage levels and the persistently scorching summer heat. Increased ambiguity about the direction of the international community is inevitable when one considers the hazy future for crude oil prices in light of the hostilities in West Asia and the output reductions being carried out by the OPEC+ producing countries.
Price stability is the primary concern for policymakers, as highlighted by the RBI’s most recent survey round.
Consumer confidence also moderated from the March survey round, with an increased majority of nearly 80% of respondents expecting price gains to accelerate in one year’s time. Households surveyed in May expect inflation to quicken for all major product groups, both over the three-month and one-year ahead periods. As he stated, anchoring inflation expectations is “the required foundation for sustained” long-term growth, therefore Governor Das’s persistent commitment on this matter is entirely justified.
ABHISHEK VERMA
