More cautious monetary policy needed if food inflation continues, says RBI

The Reserve Bank of India (RBI) on Monday, August 19, said in its monthly bulletin that India might need to adopt a more cautious monetary policy if food prices continue to rise and threaten a spillover into general inflation.

"The conventional treatment of food price perturbations as transitory in the setting of monetary policy is increasingly becoming untenable," the RBI said in its special article titled 'Are food prices spilling over?' written by Michael Debabrata Patra, Joice John and Asish Thomas George.

The bulletin noted that India’s retail inflation decreased to an almost five-year low of 3.54% in July. However, that was majorly due to a ‘base effect’, as food prices lowered from earlier high figures, indicating that the cut in prices was a temporary trend.

The RBI is expecting inflation rates to increase and stay above its medium-term target of 4% in the current quarter and the next one due to high food prices.

The RBI cited "repeated climatic shocks of rising intensity" as the reason for constant high food prices in June and July, increasing by 9.36% and 5.42%, respectively.

The central bank warned that if no action is taken against the high food prices, there is a risk of it spilling all over the general inflation rate causing low consumer and business confidence. It can also negatively impact the external sector’s sustainability and hinder the country’s growth trajectory.

The RBI added that the disinflationary monetary policy has been keeping food prices in check till now.

"Should this disinflationary force recede, upward pressures on core and headline inflation could get magnified and may run out of control, especially with aggregate demand picking up alongside cost-push risks looming in the wake of geo-political tensions," and "Going forward, therefore, if food price pressures persist and continue to spill over, a cautious monetary policy approach is warranted”, the bulletin further noted.