The target is to prevent spillover of food inflation into general inflation.
Amid increasing inflationary pressure, the Reserve Bank of India (RBI) on Tuesday said it would aim to contain the spillover of high food and fuel inflation into general inflation and anchor inflationary expectations.
“While energy prices are driven by global developments, the food price scenario is primarily a reflection of persistent structural constraints in the domestic agricultural sector,” RBI said in the third quarter monetary policy report.
The report said unless meaningful output enhancing measures were taken, the risk of food inflation becoming entrenched would loom large and threaten both the sustainability of the current growth momentum and the realisation of its benefits by a large number of households.
RBI’s policy stance is intended to focus on maintaining an interest rate regime consistent with price, output and financial stability. In addition, the stance will ensure liquidity management, with neither a surplus diluting monetary transmission nor a deficit choking off fund flows.
RBI sees the country’s large fiscal deficit as a challenge to effective management of inflation by monetary policy. The report said if the government could commit more resources to capital expenditure, it would help deal with some of the supply-side inflationary pressures.
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Since October 2009, RBI’s policy stance has changed from managing crisis to managing recovery to now managing growth. Meanwhile, it has raised the cash reserve ratio by 100 basis points, the repo rate by 175 basis points and the reverse repo rate by 225 basis points. Also, the overall liquidity in the system has turned from surplus to deficit.
High food price inflation is not unique to India. Food prices have rising in many countries in the recent period. India is a large importer of certain food items such as edible oils, and the domestic food price situation could be exacerbated by the increase in global food prices. This, therefore, poses an additional risk to domestic food price inflation.
Another factor that will shape the inflation outlook is how global commodity prices behave. Recently, prices of some commodities rose sharply even as global recovery was fragile. Should these trends continue, they will impact inflation, domestically and globally.
Also, how demand-side pressures manifest have a bearing on inflation. This risk arises from three sources — the spill-over of rising food inflation; rising input costs, particularly of industrial raw materials and oil; and pressure on wages, both in formal and informal sectors.
The rise in food inflation has not only persisted for more than two years now, the increase has been rather sharp in the recent period. This cannot but have some spill-over effects on generalised inflation.