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Admitting that the July inflation number was higher than the Reserve Bank of India’s estimates, Governor Shaktikanta Das Wednesday said the high inflation continues to remain a challenge that must be addressed effectively.
He said vegetable inflation, which led to a spike in consumer price index (CPI) inflation in July, will begin easing from September.
Retail inflation or CPI rose to a 15-month high of 7.44 per cent in July from 4.81 per cent in June. The government has mandated the central bank with keeping CPI at 4 per cent, with a comfort band of +/- 2 per cent.
“The challenge of high inflation… still persists and has to be effectively addressed. After reaching a low of 4.3 per cent in May 2023, headline inflation has risen to 7.4 per cent in July driven by the surge in tomato and other vegetable prices. The July print which was released after the MPC meeting was on the higher side compared to our estimates,” Das said while delivering a speech at the 29th Lalit Doshi Memorial Lecture.
RBI announced its monetary policy decision on August 10 and the CPI inflation print was released on August 14. In the monetary policy, The central bank left the repo rate — the rate at which it lends money to banks to meet their short-term funding needs — unchanged at 6.5 per cent for the third time in a row amid concerns over rising inflation. It revised its FY24 CPI inflation projection to 5.4 per cent from an estimate of 5.1 per cent announced in June.
Das said prices of vegetables in July surged by 37.3 per cent (year-on-year), led by an increase of 201.5 per cent in tomato prices. Reflecting these drivers, food group inflation more than doubled from 4.7 per cent in June to 10.6 per cent in July.
On the positive side, inflation excluding food and fuel (core inflation) softened by around 130 basis points from its peak in January 2023. One basis point is one-hundredth of a percentage point.
Although core inflation is still elevated at 4.9 per cent, its steady easing over the last five months is indicative of the transmission of monetary policy, he said.
Looking ahead, the spike in vegetable prices in July is starting to see a correction, led by tomato prices. New arrivals of tomatoes in mandis are already softening prices, coupled with proactive supply management in the case of onions, the RBI governor said.
“We expect to see an appreciable slowdown in vegetable inflation from September,” Das noted.
He reiterated 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 that may produce short-lived spikes in headline inflation.
“We will remain on guard to ensure that second order effects in the form of generalisation and persistence are not allowed to take hold,” he said.
Das said the frequent incidences of recurring food price shocks pose a risk to anchoring of inflation expectations, which has been underway since September 2022, and that RBI will remain watchful of this too.
“The role of continued and timely supply side interventions assumes criticality in limiting the severity and duration of such shocks. In these circumstances, it is necessary to be watchful of any risk to price stability and act appropriately and in time,” he said, adding that the RBI remains firmly focused on aligning inflation to the target of 4 per cent.
Speaking on the economy, Das said India stands out as the emerging growth engine for the world.
The country’s real gross domestic product (GDP) recorded a growth of 7.2 per cent in 2022-23, surpassing its pre-pandemic level by 10.1 per cent. For FY2024, the RBI has projected real GDP growth to be at 6.5 per cent.
Overall, the conditions are favourable for the growth momentum to continue and the capex cycle to gain momentum in 2023-24, he said.
