Recurring food price shocks pose risk to inflation expectations: RBI Governor Das

He said the role of continued and timely supply side interventions, as being undertaken by the government, assumes criticality in limiting the severity and duration of such food price shocks.

“In these circumstances, it is necessary to be watchful of any risk to price stability and act timely and appropriately. We remain firmly focused on aligning inflation to the target of 4 per cent,” the Governor said.

The government has mandated the central bank with keeping CPI at 4 per cent, with a comfort band of +/- 2 per cent.

Das 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 which may produce short-lived spikes in headline inflation.

“We remain on guard to ensure that second order effects in the form of generalisation and persistence are not allowed to take hold,” Das said.

Last month, the RBI left the repo rate unchanged at 6.5 per cent for the third consecutive time on inflation concerns. It revised its FY2024 CPI inflation projection to 5.4 per cent from an earlier estimate of 5.1 per cent. The central bank 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.

Das said that the monetary policy has to be forward looking, and a rear view mirror approach can lead to policy errors.

To take a real-life analogy, the conduct of monetary policy is like driving a car on a road with potential ditches and speed bumps, he said.

“The driver needs to see them ahead and in time to regulate the speed of his car and to negotiate the ditch or speed bump smoothly. If the driver reacts suddenly to a speedbump, he runs the risk of losing control and causing an accident,” Das said.

A successful conduct of monetary policy depends critically on credible forecasts of key variables like inflation and growth, he added.