Mumbai: Although the main source of food price rises – supply shocks – is outside the ambit of monetary policy, a disinflationary policy is required to curb price pressures, RBI deputy governor Michael Patra and others said in an article on Monday, days after governor Shaktikanta Das spelt out the central bank's stance on food inflation.
“Monetary policy is the only active disinflationary agent in the economy,” the article said. While the article was written by RBI officials, it had the usual disclaimer that the views were those of the authors and not of the central bank.
It comes after the FY24 economic survey said last month that the inflation targeting framework should consider excluding food inflation.
Food has a 46% weightage in the headline consumer price index (CPI) basket.
The current debate centres around monetary policy’s handicap on food prices as they are caused by supply-side problems like food supply issues and not by demand which can be controlled by interest rate changes.
Monday’s article pointed out that core inflation — headline inflation stripped off food and fuel — had been declining since 2022-23, mainly driven by “monetary policy actions and stance and the waning of cost-push shocks”.
“Persistence in food inflation has increased due to repeated climatic shocks of rising intensity.”
It said that food price shocks have been “imposing upside pressures on core inflation throughout these years, but this has been offset by disinflationary monetary policy”.
According to the article, if the disinflationary monetary policy retreats, price pressures on core and headline inflation could get aggravated and “run out of control”. This, it said, is a risk especially with aggregate demand picking up and a possibility of rising input costs on the back of geo-political tensions.
It said that the conventional treatment of food price changes as “transitory” in the setting of monetary policy is increasingly becoming “untenable”.
This is something that governor Das had mentioned in his monetary policy statement on 8 August. The MPC, Das had said, could look through high food inflation if it is “transitory” – but in the current environment of persistent high food inflation, the MPC cannot afford to do so.
The article cited above said, “Failing to act against persistent food inflation risks expectations getting unanchored, generalization of price pressures and loss of control over inflation, undermining of consumer and business confidence, and erosion of external sector sustainability and competitiveness, with deleterious consequences for growth prospects."
