The Reserve Bank of India (RBI) has warned that it may need to adopt a more cautious approach to monetary policy if the current surge in food prices continues, posing a risk of broader inflation.
In its latest monthly bulletin, the central bank mentioned that treating food price spikes as merely temporary is increasingly untenable, particularly as these price pressures threaten to spill over into more generalised inflation.
India’s retail inflation recently dipped to a near five-year low of 3.54 per cent in July, largely due to a base effect and a temporary easing in food prices. However, the RBI expects inflation to rise above its medium-term target of 4 per cent in the coming quarters, driven by stubbornly high food prices. The central bank attributed these price increases, which saw food inflation rise by 5.42 per cent in July and 9.36 per cent in June, to recurring and intensifying climatic shocks.
The RBI expressed concern that the persistence of high food prices, combined with the inelastic nature of demand for essential goods, could lead to a spillover effect, driving up costs in other sectors and threatening overall economic stability.
The central bank also stressed that failing to act against sustained food price inflation could lead to a loss of control over broader inflation, eroding consumer and business confidence and jeopardising the country’s growth prospects.
While current disinflationary policies have helped mitigate the impact of rising food prices, the RBI cautioned that these policies might lose their effectiveness if disinflationary pressures weaken. This could result in a significant increase in core and headline inflation, particularly as aggregate demand grows and geopolitical tensions heighten cost-push risks. Given these factors, the RBI said that a more vigilant and measured approach to monetary policy might be necessary to prevent inflation from spiraling out of control.
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