Costlier food matching MPC inflation view: RBI

Mumbai: The surge in food prices that led to higher inflation in June is in line with the view of the rate-setting panel that the fight against inflation is far from over, the Reserve Bank of India (RBI) said on Monday.

“Food price spikes typical of the onset of the monsoon drove up headline inflation in June, corroborating the monetary policy committee’s (MPC) view that the fight against inflation is far from over and monetary policy has to stay the course on the arduous last leg of the journey to align inflation with the target,” said the article titled ‘State of the economy’ in the central bank’s July bulletin.

Written by RBI officials, the article was accompanied by the usual disclaimer that views expressed are those of the authors and do not reflect the views of the organization. Inflation measured on the Consumer Price Index (CPI) came in at 4.81% in June, higher than 4.6% predicted by Mint poll of 19 economists, led by food inflation. Mint reported on 14 July that the surprise surge in retail inflation for June has prompted economists to raise their forecast for July, with rate cut possibilities looking distant.

“In India, the onset of the monsoon is typically a time for a change of gears in the growth trajectory and of sporadic price flares firming up headline inflation as in the reading for June,” the bulletin said.

Pointing out that consumption expenditure, the article said, continues to be hamstrung by lingering memories of elevated price pressures which is reflected in lower levels of spending on discretionary items such as personal care and confectionary.

According to the bulletin, spending on beverages has been held back by unseasonal rains. Progressively, the urban rural divide in sales of fast-moving consumer goods – urban spending strong; rural spending muted – narrowed within the overall moderation, it said.

“Consumers are optimistic that the onset of the festival season from August and down trending food inflation will revive spends in the second quarter of 2023-24,” it added.

Citing high frequency food price data for July so far -- up to 12 July – the article said there is a sustained increase in cereal prices. While prices of pulses and vegetables recorded a general uptick, tomato prices registered the maximum increase. Edible oil prices continued to slide down in line with the fall in global prices.

“The recent spike in tomato prices on account of crop damage due to inclement weather and pest attacks in the major production belts has received widespread attention as it has taken a toll on households’ budgets. Historically, tomato prices have been an important contributor to volatility in overall inflation,” it said, adding that the volatility also gets transmitted to prices of other vegetables in both retail and wholesale markets.

Globally, though, inflation has been moderating on the back of easing commodity prices. The bulletin pointed out that although many central banks have reduced the pace of interest rate increases, they have signalled their readiness to increase interest rates further and keep them high as long as they see the labour market as the key inflation risk.

“In response, market expectations of future interest rates have gone up, equity prices have flattened and bond yields have hardened,” it said.