By Swati Bhat
MUMBAI (Reuters) – India will have to adopt a more cautious approach to monetary policy if high food prices persist and threaten to spill over into more generalised price inflation, the Reserve Bank of India said in its monthly bulletin on Monday.
“The conventional treatment of food price perturbations as transitory in the setting of monetary policy is increasingly becoming untenable,” the RBI said in a special article titled ‘Are food prices spilling over?’.
India’s retail inflation fell to a near five-year low of 3.54% in July but largely due to a base effect as food prices eased from previous highs, suggesting the slower pace of price rises was temporary.
Indeed, the RBI expects inflation to rise and stay above its medium-term target of 4% this quarter and next due to high food prices, which account for nearly half of retail inflation.
The central bank blamed the stubbornly high food prices — a 5.42% rise in July and 9.36% in June — on “repeated climatic shocks of rising intensity.”
“The inelasticity of the demand for food to price shocks makes food inflation persistence all the more worrying” given the danger of a spillover to costs, service charges and output prices, it said.
Failing to act against high food prices risks losing control of overall inflation, which would undermine consumer and business confidence, erode external sector sustainability and hamper the country’s growth prospects, the RBI warned.
So far, disinflationary monetary policy was keeping the shock of food prices at bay, the RBI said.
“Should this disinflationary force recede, upward pressures on core and headline inflation could get magnified and may run out of control, especially with aggregate demand picking up alongside cost-push risks looming in the wake of geo-political tensions.”
“Going forward, therefore, if food price pressures persist and continue to spill over, a cautious monetary policy approach is warranted.”
(Reporting by Swati Bhat; Editing by Savio D’Souza)
