The Reserve Bank of India (RBI) on Thursday observed that the policy must continue to be actively disinflationary to ensure anchoring of inflation to its target level. In the MPC minutes released today, the central bank noted that the headline inflation has seen upward movement in June to 5.1 per cent, as food inflation pressures increased and offset the impact of subdued core (CPI excluding food and fuel) inflation and deflation in the fuel group.
Although food inflation is still high, the RBI’s rate-setting panel observed that price stability and resilient growth have created space for the monetary policy to focus unambiguously on inflation.
On future indicators, the RBI noted that headline inflation in July and Q2 of the current financial year are expected to be lower, given their base effect advantage; but with food inflation pressures showing little signs of abatement in the near-term, and household inflation expectations picking up, monetary policy has to remain vigilant to potential spillovers of food price pressures to the core components.
The statement said: “This is critical for the ‘last mile of disinflation’ and anchoring of inflation expectations. Food inflation may soften due to good monsoon, steady improvement in kharif sowing, rising reservoir levels and a likely favourable rabi season output. Uncertainty, however, comes from frequent recurrence of adverse weather events, resurgence of geo-political tensions and financial market volatility. Further, core inflation might just have bottomed out.”
“Inflation is gradually trending down, but the pace is slow and uneven. Durable alignment of inflation to the target of 4.0 per cent is still some distance away. Persistent food inflation is imparting stickiness to headline inflation,” said RBI Governor Shaktikanta Das.
Earlier this month, the Reserve Bank of India’s Monetary Policy Committee (MPC) decided to keep the policy repo rate unchanged at 6.50% for the ninth consecutive time.
He noted that the economic momentum from Q4 FY24 persisted into Q1 FY25, although there has been a slowdown in corporate profits, reduced government expenditure, and a decline in core output.
Das said that positive developments, including favorable Kharif sowing progress due to the South-West Monsoon and improved reservoir levels, which are expected to support Rabi output. Moreover, the increase in agricultural activity is likely to boost rural consumption, while urban consumption remains steady.
Governor Das lauded Flexible Inflation Targeting (FIT) for enhancing credibility and yielding positive economic outcomes. He said it is important preserving and sustaining FIT’s credibility. While inflation is gradually declining, the pace remains slow and uneven, and achieving a durable alignment with the 4% target is still distant.
Even MPC member Rajiv Ranjan noted that the risk of food inflation spilling over into non-food core CPI components. He added that monetary policy should remain actively disinflationary to ensure inflation is durably aligned with the target. Ranjan also said that there is a need for greater clarity on the food inflation outlook, spillovers, and domestic demand. He noted that resilient growth provides the opportunity to stay focused on controlling inflation.
