‘Can’t ignore food inflation pressures’: RBI Governor Shaktikanta Das differs from Survey idea

The public at large understands inflation more in terms of food inflation than the other components of headline inflation.”

“With the high share of food in the consumption basket, food inflation pressures cannot be ignored,” Governor Das said after the RBI’s Monetary Policy Committee (MPC) left the main policy instrument, the Repo rate, unchanged at 6.5 per cent for the ninth consecutive time as “persisting high food inflation” continued to remain a risk. The central bank retained the 2024-25 retail inflation projection at 4.5 per cent and the real gross domestic product (GDP) growth at 7.2 per cent.

Food inflation, with a weight of around 46 per cent in the consumer price index (CPI) basket, contributed to more than 75 per cent of headline inflation in May and June. “Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably,” he said.

“The MPC judged that it is important for monetary policy to stay the course while maintaining a close vigil on the inflation trajectory and the risks thereof. Resilient and steady growth in GDP enables monetary policy to focus unambiguously on inflation. It must continue to be disinflationary and resolute in its commitment to aligning inflation to the target of 4 per cent on a durable basis,” Das said while announcing the monetary policy.

Under the flexible inflation-targeting regime, the RBI has to maintain CPI in the 2-6 per cent range. It has set a target to bring down inflation to 4 per cent on a durable basis. Headline CPI inflation edged up to 5.1 per cent in June 2024 from 4.8 per cent in May, due to higher-than-expected food inflation. Core inflation (CPI excluding food and fuel), on the other hand, moderated to a historic low in May and June.

Asked about his views on excluding food from retail inflation, Das said, “I don’t have any personal view. These all are institutional views. The NSO (National Statistical Office) survey is on and depending on the data, a decision will be taken at the appropriate time between the government and the Reserve Bank.”

He said the NSO is conducting a consumption expenditure survey on the CPI basket and based on the findings, the weight of core, fuel and food will be decided. The NSO is yet to come out with a definitive conclusion in terms of weights of all the components of CPI headline inflation, he said.

While the RBI retained the FY25 CPI inflation projection at 4.5 per cent, it revised upwards the retail inflation forecasts for Q2 and Q3 FY25 to 4.4 per cent and 4.7 per cent, compared to 3.8 per cent and 4.6 per cent, respectively.

“The MPC may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so. It has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility,” the Governor said.

While the RBI maintained FY25 real GDP projection at 7.2 per cent, the forecast for Q1 FY25 (April-June quarter) was revised downward to 7.1 per cent from 7.3 per cent earlier.

Das said the domestic economic activity continues to be resilient. Domestic growth is holding up well on the back of steady urban consumption and improving rural consumption, coupled with strong investment demand.

On the demand side, household consumption is supported by a turnaround in rural demand and steady discretionary spending in urban areas, he said.

“Looking ahead, improved agricultural activity brightens the prospects of rural consumption, while sustained buoyancy in services activity would support urban consumption. The healthy balance sheets of banks and corporates; thrust on capex by the government; and visible signs of pick up in private investment would drive fixed investment activity. Improving prospects of global trade are expected to aid external demand,” he said.