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Erratic Food Prices Unlikely to Upset Inflation Projections 2023

Erratic Food Prices Unlikely to Upset Inflation Projections 2023

An MPC member claims that rate reduction should only be considered when headline retail inflation remains below 5%.

According to Ashima Goyal, an external member of the Reserve Bank of India’s Monetary Policy Committee (RBI MPC), despite retail inflation, India’s Consumer Price Index (CPI) rose to 4.81% in June, marking the first increase in five months. However, this is expected to have a negligible impact on the projected retail inflation trajectory for the current fiscal period.

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“Food prices are erratic during the monsoon, but also transient, so they are not expected to cause major changes in expected retail inflation,” the MPC member added. The Q1FY24 CPI inflation is anticipated to be about 4.6%, the Q2 estimate is 5.4%, and the Q3 and Q4 estimates are estimated to be 5.4% and 5.2%, respectively, according to the RBI’s estimations.

The RBI had predicted 5.4% core inflation for June, but Goyal, an emeritus professor of economics at the Indira Gandhi Institute for Development Research, pointed out that the actual rate is 5.1%. Continued decrease in core (inflation), which is the more enduring component of inflation, is encouraging, according to Goyal.

Goyal responded that inflation forecasts of around 5% give a reasonable real interest rate of 1.5% and that the RBI will only consider rate cuts when headline retail inflations sustain below the 5% mark when asked whether the higher retail inflation print in June would further delay chances of RBI cutting repo rate in 2023.

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As a result of increased food costs, retail inflation in June reached a three-month high of 4.81%. The external member of the RBI MPC, Professor Jayant Varma, stated that he did not see the month-to-month volatility as a cause for worry. “I warned against interpreting two months of low inflation too broadly in my MPC statement from June, and I would add the same caution for two months of substantial inflation. I’m still optimistic that inflation will be on a glide path towards the goal three to four quarters from now.

In response to a question on the RBI MPC’s position while core inflation remains over 5%, he stated, “I cannot speak for the rest of the MPC, but I expect core inflation to also moderate in coming quarters due to the lagged effect of the past rate hikes, and the cooling of commodity prices.”

“You are right that a below-normal monsoon would be as much of a growth shock as an inflation shock,” he remarked about potential decreased monsoon rainfall and its effects on rural consumption and salaries. Dual shocks of this nature provide unique difficulties for monetary policy. But as of right now, the official prognosis is still calling for a typical monsoon, and I hope that it will be accurate.

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A recent fluctuation in food prices has caught the attention of economists, policymakers, and consumers worldwide. Despite concerns that these erratic food prices could exacerbate inflationary pressures, Finance Minister Piyush Goyal has asserted that India’s inflation projections remain steady, dismissing concerns as premature.

In 2023, global food markets experienced a period of price volatility due to various factors. These ranged from climate change disrupting agricultural patterns, trade restrictions resulting from geopolitical tensions, supply chain disruptions, and ongoing recovery from the COVID-19 pandemic. These trends affected significant economies, including India, triggering anxiety about potential implications on the country’s inflation dynamics.

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In a press conference on July 10, Finance Minister Piyush Goyal sought to dispel fears about the possible impact of unpredictable food prices on India’s inflation. He asserted that despite the recent volatility in food prices, it was unlikely to upset the country’s inflation projections for the year.

Goyal outlined several reasons for his confidence in maintaining the country’s inflation trajectory. First, he highlighted the robustness of India’s food supply chains, which have proven resilient against significant disruptions. Secondly, he pointed out the proactive policy measures implemented by the government to stabilize food prices and secure food supplies. These include strategically using buffer stocks, price stabilization funds, and farmer support initiatives.

In conclusion, Goyal mentioned that the Consumer Price Index (CPI) places less importance on food, which helps to lessen the impact of fluctuating food prices on the total inflation rates. Thus, while food price volatility may cause temporary spikes, it is unlikely to alter the overall inflation trajectory drastically.

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Several economic analysts concur with Goyal’s assessment. Notably, the impact of food prices on inflation is contingent upon the persistence of price shocks. Unless they are extraordinarily large or sustained for an extended period, temporary food price increases will not significantly affect the overall inflation outlook.

However, they cautioned that this does not diminish the importance of close monitoring and strategic management of food price fluctuations. The government must remain vigilant and ready to implement appropriate policy responses.

Despite Goyal’s reassurances, the immediate impact of food price fluctuations on consumers must be considered. Increasing food costs can create financial difficulties for households, especially those with low incomes who allocate considerable earnings to food expenses.

However, the government has underscored its commitment to protecting vulnerable populations from food price spikes. This includes direct transfers, subsidized food distribution through public distribution systems, and other social safety net programs.

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While erratic food prices are a cause for concern, Finance Minister Piyush Goyal’s comments indicate that these fluctuations are unlikely to disrupt India’s inflation projections for 2023. The key to weathering this situation will be proactive and strategic management, strong policy measures, and a keen focus on supporting vulnerable populations. Only time will tell how this plays out, but for now, it appears that the Indian economy has the situation well in hand.

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