Economic Survey had suggested exploring whether inflation targeting framework of the central bank should exclude foodEconomic Survey had suggested exploring whether inflation targeting framework of the central bank should exclude food
Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday said with food inflation comprising 46 per cent of the consumption basket, the pressures from it cannot be ignored by the monetary policy committee (MPC).
His remarks come after a recent suggestion in the Economic Survey that India’s inflation-targeting framework should exclude food prices.
Click here to connect with us on WhatsApp
In the monetary policy statement, Das noted that persistent food price shocks have hindered the disinflation process in Q1FY25.
“…our target is the headline inflation wherein food inflation has a weight of about 46 per cent. With this high share of food in the consumption basket, food inflation pressures cannot be ignored,” Das said, adding that the public at large understands inflation more in terms of food inflation than the other components of headline inflation.
“Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably,” he said.
This year’s Economic Survey has suggested exploring whether India’s inflation-targeting framework should exclude food inflation, and India’s chief economic adviser V Anantha Nageswaran highlighted that monetary policy is a short-run macro aggregate demand management tool, which cannot manage aggregate supply shock and food shocks are predominantly supply shocks.
Das explained that while the MPC may look through high food inflation if it is transitory, in an environment of persisting high food inflation, as we are experiencing now, the committee cannot afford to do so. “MPC has to remain vigilant to prevent spill-overs or second-round effects from persistent food inflation to preserve the gain so far made in monetary policy credibility,” Das said.
India’s headline inflation increased to 5.1 per cent in June — after remaining steady at 4.8 per cent during April and May — driven by food inflation pressure, which was primarily led by a sharp increase in prices of vegetables, pulses and edible oils along with a pick-up in inflation across cereals, milk, fruits and prepared meals. However, core inflation (CPI excluding food and fuel) was at 3.1 per cent in May-June, touching a new low in the current CPI series.
According to Das, MPC’s vigil on food inflation stems from the fact that high food inflation adversely affects household inflation expectations, which have significant impact on future trajectory of inflation. Persistently high food inflation and unanchored inflation expectations, if they materialize, could lead to spill-over to core inflation through pick-up in wages on cost of living considerations, Das said.
“This, in turn, could be passed on by the firms in the form of higher prices of services as well as goods, especially in a scenario of strong aggregate demand. These behavioural changes can result in overall inflation becoming sticky even after food inflation recedes,” he added.
Commenting on the issue of weightage of food in CPI, Das said, “The current CPI basket and the weight core, fuel and food, were decided in 2011 data. Years have passed by and there should have been one more review, but because of Covid, it could not be undertaken.” The NSO survey is on and depending on what the data throws up, a decision will be taken at the appropriate time between the government and the RBI, he added.
Economy