Food-price volatility may pose risk to India's inflation: RBI Bulletin

India's headline inflation may average 4.5 per cent in the second half of the fiscal year, aided by weaker crude oil prices, although volatility in food prices can pose a challenge, the central bank said in its monthly bulletin on Friday.

"Some vegetable price shocks have begun to reverse, and if this continues and broadens, the persistence that characterised food inflation developments in the first quarter of 2024-25 may be behind us," the Reserve Bank of India said.

India's retail inflation was at 3.65 per cent in August, higher than the revised 3.60 per cent in July, as vegetable prices soared.

 

Food prices, which account for nearly half of the retail inflation, rose 5.66 per cent in August, compared with a 5.42 per cent climb in the previous month.

The RBI targets inflation at 4 per cent with a tolerance band of two percentage points on either side.

An unfavourable base effect may "haunt" September's inflation print, the RBI said.

Household consumption, however, is poised to grow faster in July-September period as headline inflation eases, it added.

The RBI, which kept its key interest rate unchanged for the ninth straight meeting in August, is expected to proceed cautiously with monetary policy easing.

Its next monetary policy meeting is scheduled for Oct. 7-9.

The gap between banks' credit and deposit growth is beginning to narrow, with lenders continuing to rely heavily on certificates of deposit to meet funding needs, the central bank noted.

"Non-banking financial companies (NBFCs) are increasingly turning to offshore bonds," it added.

"Microfinance institutions are facing some asset quality issues, warranting slowing down the pace of loan growth."

NBFCs need to remain mindful of the rapidly evolving financial landscape and risks pertaining to cyber-security and climate risks, the RBI said in a separate article in the bulletin.

It is "incumbent" upon NBFCs to proactively identify and manage risks as well as bolster their assurance functions to ensure financial stability, it said.