RBI (Reserve Bank of India) Governor Shaktikanta Das underscores the significant impact of rising food and milk prices on inflation. He emphasizes the need for careful monitoring of food inflation due to its high weight in the CPI basket and its effects on core inflation, household expectations, and monetary policy. The RBI’s approach must address these inflationary pressures while ensuring financial stability.
As food and milk prices surge, the Reserve Bank of India (RBI) has intensified its focus on inflation control. RBI Governor Shaktikanta Das recently highlighted the significant role of food inflation in shaping monetary policy, emphasizing its implications for the broader Indian economy. This article explores these dynamics, the challenges faced by the RBI, and potential future actions.
The Role of Food Inflation in Monetary Policy
Food inflation is a major component of India’s Consumer Price Index (CPI), contributing around 46% to the overall basket. In May and June 2024, food inflation accounted for more than 75% of headline inflation, with a substantial rise in vegetable prices contributing 35% to June’s inflation rate. Governor Das underscored the importance of not overlooking such critical factors, especially given their direct impact on the cost of living for the majority of the population.
In particular, Das emphasized that while core inflation has shown signs of broad-based softening, the persistence of high food prices could undermine this progress. He warned that if food inflation remains elevated, it could prompt the RBI to consider more aggressive measures, such as raising interest rates, to curb inflationary pressures.
Milk Prices and Core Inflation Divergence
Milk, a staple in the Indian diet, has seen notable price increases, which are further complicating the inflation scenario. This has contributed to a growing divergence between headline and core inflation, with core inflation—excluding food and fuel prices—showing more stability. However, the continued rise in essential commodities like milk creates pressure on the overall inflation rate, which could lead to potential spillovers into other sectors.
Das noted that the revisions in milk prices, along with other essential commodities, require close monitoring. These increases not only impact household budgets but also influence inflation expectations, which in turn could prompt further price hikes in unrelated sectors as businesses pass on the higher costs to consumers.
Impact on Household Inflation Expectations
Rising food prices have a direct impact on household inflation expectations, which are critical in determining future inflation trends. Since November 2023, elevated food prices have led to a rise in household inflation expectations, reversing the moderation observed between May 2022 and September 2023. Das cautioned that if these expectations remain unanchored, they could lead to wage increases driven by cost-of-living concerns, further fueling inflation.
Moreover, high household inflation expectations can lead to a self-fulfilling cycle of price increases, where consumers and businesses alike anticipate higher costs and adjust their behavior accordingly. This could result in a more persistent inflationary environment, complicating the RBI’s efforts to achieve its inflation targets.
Excluding Food Inflation from the Inflation Targeting Framework
The Economic Survey 2023-24 proposed excluding food inflation from the inflation targeting framework, suggesting that volatile food prices should not dictate monetary policy. However, Das responded by emphasizing the centrality of food inflation in shaping public perceptions and influencing overall inflation trends. He revealed that the National Statistics Office (NSO) is conducting a comprehensive survey on food price inflation, which could inform future policy decisions.
The proposal to exclude food inflation has sparked debate among policymakers and economists. Critics argue that ignoring food inflation could lead to a disconnect between monetary policy and the real economy, as food prices directly affect the purchasing power of a large segment of the population. On the other hand, proponents suggest that focusing solely on core inflation could provide a clearer picture of underlying inflationary pressures, allowing for more targeted policy interventions.
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Financial Stability Concerns
In addition to inflationary pressures, Governor Das expressed concern over the rapid growth of home equity loans and top-up housing loans, particularly among banks and Non-Banking Financial Companies (NBFCs). He noted that some lenders are not strictly adhering to regulatory requirements related to loan-to-value (LTV) ratios, risk weights, and monitoring the end use of funds. This laxity could lead to loaned funds being diverted into unproductive or speculative segments, posing risks to financial stability.
Das urged banks and NBFCs to review and strengthen their lending practices, emphasizing the need to maintain strict oversight to prevent the buildup of systemic risks. He also highlighted the importance of ensuring that credit growth is directed towards productive sectors that contribute to economic growth rather than fueling asset bubbles or speculative investments.
As India grapples with rising food and milk prices, the Reserve Bank of India faces significant challenges in balancing inflation control with economic growth. Governor Shaktikanta Das’s emphasis on the critical role of food inflation in monetary policy highlights the complexities of managing an economy where food prices play a central role in shaping inflation expectations and public perceptions.
The RBI’s vigilant approach, including close monitoring of price movements and lending practices, will be crucial in navigating these challenges. As the central bank continues to assess the impact of rising food prices, its actions will play a key role in shaping India’s economic trajectory in the months ahead.
