rbi-cautious-policy-needed-if-food-inflation-persists

Persistent food inflation could necessitate a cautious approach to monetary policy, as such price pressures may not be fleeting and could spill over into broader inflation, according to a report authored by Reserve Bank of India Deputy Governor Michael Debabrata Patra and others.

The report, titled *Are Food Prices Spilling Over?*, argues that monetary policy remains the only effective tool for disinflation in the economy. It emphasises that if food price pressures continue, monetary policy must adapt cautiously.

“Treating food price fluctuations as temporary in monetary policy settings is increasingly untenable,” the report states, noting that the persistence of food inflation has become more entrenched. This persistence is largely driven by rising food inflation expectations, which have seen a significant upward trend.

From June 2020 to June 2024, food inflation in India remained at or above 6 per cent for 57 per cent of the months, with six out of 12 food sub-groups experiencing 6 per cent or higher inflation in half or more of these months. This, the authors say, highlights the widespread and persistent nature of high food inflation.

Despite the success of disinflationary monetary policy in reducing core inflation to historic lows, food price pressures have persisted in recent months, according to the report. The authors warn that the benefits of reducing core inflation could be undermined if food inflation continues to influence households' inflation expectations, potentially leading to broader price increases.

The report also highlights that high food inflation is preventing the alignment of headline inflation with its target in India, making it an increasingly critical factor in monetary policy decisions.

Multiple overlapping supply shocks have contributed to the persistence of food inflation, including climate events affecting monsoon distribution, sharp increases in surface temperatures, and unseasonal rainfall. Global climate patterns, such as the triple-dip La Niña event and ongoing El Niño conditions since 2020, have also played a significant role.

The report points out that 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, indicating a marked shift in the inflationary landscape.