RBI Governor Says Recurring Food Price Shocks Pose Risk To Anchor Inflation Expectations, Remains Watchful

The Reserve Bank of India (RBI) governor Shaktikanta Das said that the frequent incidences of recurring food price shocks pose a risk to anchoring inflation expectations. He added the central bank will remain watchful. Recently, Das in a briefing mentioned that inflation may moderate from September onward, however, will remain high in August.

On September 5, Shaktikanta Das spoke at the Art of Monetary Policy Making: The Indian Context during the celebration of the Diamond Jubilee Year of the Delhi School of Economics (DSE).

While addressing, Das explained the basics of high and low inflation.

He said, low and stable inflation helps households and businesses in planning for long-term savings and investments which ultimately drive innovation, productivity and sustainable growth. On the contrary, high and volatile inflation corrodes the economy by denting productivity and the long-term growth potential. Inflation also imposes a disproportionate burden on the poor.

Das said, "In early 2022, inflation in India was expected to moderate significantly with a projected average rate of 4.5 per cent for 2022-23. This was premised upon an anticipated normalisation of supply chains, the gradual ebbing of COVID-19 infections and a normal monsoon. Such expectations were, however, belied by the outbreak of hostilities in Ukraine in February 2022."

This led RBI to hike the repo rate by 40 bps in an off-cycle meeting in May 2022, followed by rate hikes of varying sizes, in each of the five subsequent meetings till February 2023. Overall, MPC raised the repo rate by 250 from May 2022 to February this year.

"The quantum of rate hikes was calibrated keeping in view the changing inflation outlook," Das said.

He further added, "We have maintained a pause in the April, June and August 2023 meetings of the MPC as the 250 bps hike is still working through. Headline inflation had eased to 4.8 per cent in June 2023 from the peak of 7.8 per cent in April 2022. It, however, surged to 7.4 per cent in July, mainly on account of a spurt in vegetable prices which have already started moderating,"

Das noted in my monetary policy statement on August 10, 2023, that given the likely short-term nature of the vegetable price shocks, monetary policy can await the dissipation of the first-round effects of such shocks which may produce short-lived spikes in headline inflation.

Furthermore, he added, "We remain on guard to ensure that second-order effects in the form of generalisation and persistence are not allowed to take hold."

"The frequent incidences of recurring food price shocks pose a risk to anchoring of inflation expectations, which has been underway since September 2022," Das said.

Also, Das said that RBI will remain watchful and focused on aligning inflation to the target of 4%.

"We will remain watchful of this also. The role of continued and timely supply-side interventions, as being undertaken by the government, assumes criticality in limiting the severity and duration of such food price shocks. In these circumstances, it is necessary to be watchful of any risk to price stability and act timely and appropriately. We remain firmly focused on aligning inflation to the target of 4%," he said.

Last week, the RBI governor also stated that inflation is expected to start easing from September onward but will remain high in August, as per PTI.

In August policy, RBI projected CPI inflation to be at 5.4% for the financial year 2023-24.