Cautious monetary policy needed if food inflation persists: RBI paper

Untenable to treat food price fluctuations 'transitory' in monetary policy settings: Report

Monetary policy must adopt a cautious approach if food inflation persists, as such shocks may not be transient and could spill over into generalised inflation, according to a report titled Are Food Prices Spilling Over? authored by Reserve Bank of India Deputy Governor Michael Debabrata Patra and others.

“Monetary policy is the only active disinflationary agent in the economy. Therefore, if food price pressures persist and continue to spill over, a cautious monetary policy approach is warranted,” the report stated.

The report indicates that treating food price perturbations as transitory in monetary policy settings is becoming increasingly untenable.

“A large part of this increase in persistence is driven by the secular upward drift in food inflation expectations,” it added.

Observing that high food inflation has become endemic in the 2020s, the authors said a staggering 57 per cent of months between June 2020 and June 2024, food inflation was at or above 6 per cent, with around six of 12 food sub-groups experiencing 6 per cent and above inflation for 50 per cent or more of these months.

“This attests to the broad-based nature of high food inflation persistence,” the report said.

The report highlighted that, despite core inflation falling to historic lows due to disinflationary monetary policy, food price pressures have remained unrelentingly persistent in recent months. Consequently, the report argues that the benefits of reducing core inflation could be undermined.

“High food inflation is influencing households’ inflation perceptions and expectations, with potential spillovers into non-food prices,” the report said.

It added that food inflation is hindering the alignment of headline inflation with its target in India and can no longer be ignored in monetary policy decisions.

The report cites multiple overlapping supply shocks, including recent climate events that have affected the distribution of monsoons, caused sharp increases in surface temperatures, and led to unseasonal rainfall. Additionally, global climate systems, such as the triple-dip La Niña event and El Niño conditions since 2020, have also played a role.

Food inflation has averaged 6.3 per cent during the 2020s, in stark contrast to the 2.9 per cent average seen between 2016 and 2020.