When food inflation became main course on MPC menu

While headline inflation measured by the consumer price index (CPI) cooled a bit from 5.1% in January to 5.09% in February, food inflation rose from 7.58% in January to 7.76%. Food inflation rose primarily driven by vegetables, eggs, meat and fish, the Reserve Bank of India’s (RBI) monetary policy committee (MPC) said.

March inflation numbers, released a week after the MPC meeting, showed that headline inflation further cooled to 4.85%, while food inflation remained sticky at 7.68%.

“Overlapping food price shocks, apart from imparting volatility to headline inflation, may also result in spillovers to core inflation," RBI governor Shaktikanta Das said, according to the minutes of the six-member committee's meeting on 3-5 April.

Retail inflation has stayed within RBI’s flexible inflation target of 2-6% for the seventh consecutive month. The RBI has, however, reiterated the inflation target is 4% and the central bank would look for durable signs of deceleration in inflation.

“This success in the disinflation process should not distract us from the vulnerability of the inflation trajectory to the frequent incidences of supply side shocks, especially to food inflation due to adverse weather events and other factors," said Das.

According to Das, lingering geo-political tensions and their impact on commodity prices and supply chains also add to uncertainties in the inflation trajectory. These, he said, call for monetary policy actions to tread the last mile of disinflation with extreme care.

Deputy governor Michael Patra said recent inflation data and high-frequency data on food prices show that food inflation risks remain elevated. He said the leeway from steady softening of core inflation and fuel price deflation would not necessarily lead to a faster alignment of the headline with the target.

Patra expects headline inflation to remain nearer to 6% until favourable base effects come into play in the second quarter of FY25. The MPC projected retail inflation to decline to 3.8% in Q2 FY25, before breaching the 4% mark again in the next two quarters.

“Hence, conditions are not yet in place for any let-up in the restrictive stance of monetary policy. Downward pressure on inflation must be maintained until a better balance of risks becomes evident and the layers of uncertainty clouding the near-term clear away," said Patra.

For FY25, RBI has estimated inflation at 4.5%. Going by the second advance estimates of FY24 GDP growth at 7.6%, the average growth over the last three years would come to 8%. Growth in FY25, estimated by RBI at 7%, would thus be affected by some base effect, Mint reported earlier in April.

According to RBI executive director and MPC memberRajiv Ranjan, although low core inflation would further the disinflation process, concerns remain on food inflation outlook.

“We need to remain watchful on upside risks to inflation outlook from adverse climatic factors, supply side shocks and geopolitical events. Going ahead, while monetary policy seems to be on the right track, it is too early to ease guard against inflation," said Ranjan.

He believes that the MPC needs to gain more confidence on the macroeconomic numbers for FY25 and their nuances. “We are just at the beginning of the financial year," he said. “Return of inflation to the 4% target is our objective and having come this far, it is not far from sight. Instead of haste for policy action, patience is the need of the hour."

External member Ashima Goyal said India did not have a tight labour market but recurrent food price shocks created persistent inflation. Goyal said that a rapid rise in repo rates, as well as government supply-side action, helped anchor inflation expectations.

Fellow member Jayanth Varma reiterated what he said in the last meeting. He said that despite an uptick in crude oil prices, the outlook for inflation continues to be benign. “I remain convinced that a real interest rate of 1-1.5% would be sufficient to glide inflation to the target of 4%. The current real policy rate of 2% (based on projected inflation for 2024-25) is therefore excessive," said Varma, the sole dissenter on stance as well as the repo rate pause.