Acknowledging that the inflation figure for July surpassed the Reserve Bank of India's projections, Governor Shaktikanta Das emphasized on Wednesday that the ongoing issue of elevated inflation presents a persistent challenge that requires effective resolution.
He pointed out that the inflationary pressure from vegetable prices, which contributed to the notable increase in the consumer price index (CPI) inflation in July, is anticipated to gradually ease starting from September.
The retail inflation, as measured by the CPI, escalated to a 15-month peak of 7.44 percent in July, a significant rise from 4.81 percent in June. The government has tasked the central bank with maintaining the CPI within a range of 4 percent, with an acceptable deviation of +/- 2 percent.
"The enduring issue of elevated inflation... remains and necessitates a comprehensive resolution. After touching a nadir of 4.3 percent in May 2023, headline inflation has surged to 7.4 percent in July, primarily propelled by a sharp escalation in tomato and various other vegetable prices. Governor Das, during his address at the 29th Lalit Doshi Memorial Lecture, noted that the July data, which was disclosed following the MPC meeting, exceeded our initial estimates."
"Announcing its monetary policy decision on August 10, the RBI unveiled the CPI inflation figures on August 14. The central bank, in its monetary policy statement, opted to maintain the repo rate—signifying the interest rate at which it lends funds to banks to cater to their short-term financial requirements—at a steady 6.5 percent for the third consecutive time, expressing concerns regarding the mounting inflationary pressures. The projection for FY24 CPI inflation was revised by the RBI to 5.4 percent, a shift from the earlier estimate of 5.1 percent announced in June."
"Governor Das elaborated that vegetable prices experienced a substantial surge in July, witnessing a year-on-year increase of 37.3 percent, with tomato prices soaring by an astounding 201.5 percent. Consequently, inflation within the food category more than doubled, rising from 4.7 percent in June to 10.6 percent in July."
On a positive note, the inflation measure that excludes food and fuel costs (referred to as core inflation) has shown a reduction of approximately 130 basis points since reaching its peak in January 2023. A basis point denotes one-hundredth of a percentage point.
Despite still standing at an elevated 4.9 percent, the consistent decline observed in core inflation over the last five months signifies the effective transmission of monetary policy, as highlighted by the Governor.
Looking ahead, the surge in vegetable prices witnessed in July is beginning to correct itself, led by the moderation in tomato prices. The influx of fresh tomato supplies in marketplaces is already contributing to a softening of prices. Moreover, the proactive management of supply in the case of onions is further aiding this process, as mentioned by the RBI governor.
"We anticipate a notable deceleration in the rate of vegetable inflation starting from September," remarked Das.
He restated that considering the probable transient nature of the disruptions caused by vegetable price fluctuations, monetary policy can adopt a patient stance, awaiting the gradual fading of the initial impacts of these disturbances, which might lead to brief upsurges in overall inflation.
"We will maintain vigilance to prevent the emergence of secondary impacts, characterized by widespread and prolonged effects," he added.
Das highlighted that the repetitive occurrences of food price fluctuations represent a potential threat to the stability of inflation expectations, a trend that has been in progress since September 2022. He emphasized that the RBI will also maintain a vigilant stance on this matter.
"The significance of consistent and well-timed interventions from the supply side becomes pivotal in mitigating the extent and duration of these disruptions. Given these conditions, it becomes imperative to carefully monitor any potential jeopardy to price stability and take suitable and timely actions," he commented. He further added that the RBI's unwavering attention remains directed at aligning inflation with the designated target of 4 percent.
