Volatility in Food Prices May Not Disturb the Inflation Projections in India

While India witnessed a rise in retail inflation in June, with the Consumer Price Index (CPI) reaching 4.81%, it is unlikely to significantly impact the projected retail inflation trend for the ongoing fiscal year, according to Ashima Goyal, an External Member of the Reserve Bank of India’s Monetary Policy Committee (RBI MPC).

The MPC member noted that food prices tend to fluctuate during the monsoon season but are temporary in nature. Hence they are not anticipated to bring about significant shifts in the expected retail inflation. Per the Reserve Bank of India’s forecasts, the projected CPI inflation for the first quarter of fiscal year 2023-24 is approximately 4.6%. The estimate for the second quarter is 5.4%, while the projections for the third and fourth quarters are 5.4% and 5.2%, respectively.

Goyal, who holds the position of Emeritus Professor of Economics at the Indira Gandhi Institute for Development Research, further mentioned that the core inflation, which stands at 5.1%, is actually lower than the RBI’s projected figure of 5.4% for June. Goyal stated, “As core inflation is the more enduring element of inflation, the ongoing decline in core inflation is a positive sign for the future.”

In response to queries regarding the potential impact of the elevated retail inflation figure in June on the likelihood of the RBI reducing the repo rate in 2023, Goyal clarified that inflation forecasts around 5% would result in a reasonable real interest rate of 1.5%. Goyal added that the RBI would consider rate cuts only if headline retail inflation remains below the 5% threshold over a sustained period.

In response to the retail inflation reaching a three-month high of 4.81% in June, mainly due to increased food prices, Professor Jayant Varma, an external member of the RBI MPC, expressed that month-to-month fluctuations were not a cause for concern from his perspective. Varma referred to his previous MPC statement in June, emphasising that attaching excessive significance to two months of low inflation was unwarranted. Similarly, he now highlighted the importance of not overreacting to two months of high inflation. Looking ahead over 3-4 quarters, Varma maintained his confidence in the trajectory of inflation, moving towards the target, suggesting a gradual and controlled path.

When queried about the RBI MPC’s perspective on core inflation persisting above 5%, Professor Jayant Varma stated that he could not speak on behalf of the entire committee. However, he expressed his expectation that core inflation would decrease in the upcoming quarters. He attributed this anticipated moderation to the delayed impact of previous rate hikes and the cooling of commodity prices.

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