Inflation to remain ‘well above’ 6% in Q2, stagflation risk low: RBI article

“Despite the sharp pick-up in inflation, the risk of stagflation remains low at the current juncture,” said the RBI’s State of the Economy report released in the August bulletin.

In April-June quarter of FY2024, headline inflation moderated to 4.6 per cent.

“The incidence of supply shocks is not over — elevation in vegetable prices has extended into the first half of August. Accordingly, headline inflation is expected to average well above 6 per cent in the second quarter,” the RBI article said.

The article has been authored by RBI Deputy Governor Michael Patra and other central bank officials. The RBI said the views in the article are those of the authors and not of the institution.

In the monetary policy announced last week, the RBI revised its FY2024 CPI inflation projection to 5.4 per cent from an earlier forecast of 5.1 per cent. It also raised CPI inflation forecast for the second quarter to 6.2 per cent vs 5.2 per cent and for the third quarter to 5.7 per cent vs 5.4 per cent.

The RBI article said the uptick in inflation in its June reading mutated in July, with the unprecedented shock to tomato prices spilling over to prices of other vegetables.

The vulnerability of the economy to recurring incidence of vegetable price shocks, especially ahead of and during the monsoon warrants major reforms in perishable supply chains covering transportation networks, warehousing and storage technologies, and value addition processes that damp the amplitude of these swings, the authors said.

Stable prices for consumers, assured supplies and remunerative proceeds for farmers will follow when these reforms lead to efficiency and productivity gains while preserving the quality of output and building up insulation against food inflation from climatic events, they said.

The authors warned that the shadow of El Nino looms over the second half of the year and the outcome for food inflation in the rabi season.

“Yet another upside risk is the outlook on crude oil prices that is marred by ‘engineered’ supply shortfalls,” the RBI article said, adding that there is a diminishing probability of crude price pressures easing over the rest of the year, which bodes ill for net energy importers like India.

The demand restraint exercised by monetary policy and supply augmenting measures are offsetting these price pressures considerably. In the absence of these policy responses, the inflation outlook would have been far more adverse.

The commitment to remain anti-inflationary should quell threats to macroeconomic stability and help anchor expectations, it said.