In most major economies, central banks have either begun to cut interest rates or are on the cusp of doing so. In June, the European Central bank cut interest rates.
In its August meeting, the RBI’s monetary policy committee decided to keep interest rates unchanged, and maintain its stance of remaining focused on the withdrawal of accommodation. The committee’s decision is along expected lines. Headline retail inflation, as measured by the consumer price index, had risen to 5.08 per cent in June, from 4.8 per cent in May, driven by a surge in food prices. Looking ahead, a possible moderation in prices in the second quarter is not expected to last. The RBI projects inflation for the full year at 4.5 per cent. With growth holding up — the central bank expects the economy to grow at 7.2 per cent this year — it provides the MPC the policy space to focus on inflation. In his comments, RBI Governor Shaktikanta Das noted that policy “must continue to be disinflationary” and remain focused on “aligning inflation to the target of 4 per cent on a durable basis.”
In June, the food price index had risen to 9.36 per cent, up from 8.69 per cent the month before. Inflation remains high across food categories such as cereals, pulses, and vegetables. There are concerns over the adverse impact of high food inflation on household inflation expectations. Governor Das noted that inflation expectations have edged upwards “on the back of high food inflation” over the past several months. If food inflation remains high and household inflation expectations become unanchored, it could spill over to core inflation. So far, core inflation, which excludes the volatile food and fuel components, has remained subdued. In fact, as Das also noted, core inflation was at a “historic low” of 3.1 per cent in May and June. This has led to the deepening divergence between core and headline inflation.
In most major economies, central banks have either begun to cut interest rates or are on the cusp of doing so. In June, the European Central bank cut interest rates. More recently, the Bank of England has lowered rates. And in its most recent meeting, the US Federal Reserve has also indicated the possibility of cutting rates in its September meeting. In fact, considering that the recent US labour market data came in significantly below expectations, some are now factoring in the possibility of deeper cuts by the Fed. The next MPC meeting is scheduled to be held in October. With the harvesting of the crops, and new mandi arrivals, prices could begin to ease. Global food prices, as seen through the FAO food price index, have already eased in July. This could provide the MPC more clarity on the path of food inflation, which would lead to greater certainty on the trajectory of interest rates.
© The Indian Express Pvt Ltd
First uploaded on: 09-08-2024 at 07:10 IST