Reserve Bank of India Governor Shaktikanta Das has on multiple occasions stated that the central bank is committed to bring CPI (consumer price index) inflation to the 4 per cent target on a durable basis. The target is 4 per cent and not 2 per cent to 6 per cent he has insisted. Core inflation has come down over the past several months, aiding RBI's inflation fight. However, high food inflation remains a challenge and that will continue to weigh on the central bank's monetary policy in the coming months.
The latest data released by the government shows, CPI inflation in June rose to a four-month high of 5.08 per cent from 4.8 per cent in May. Food inflation has shot up to a six-month high of 9.36 per cent in June from 8.69 per cent in May.
Prices of staple vegetables have risen. Also, inflation in pulses and cereals has been high. There are several reasons behind food inflation remaining high, both supply side and demand side.
"Last year's reduced output, the impact of heat weave in May-June on the shelf life of vegetables and heightened demand due to the festive season last month have all contributed to the sequential uptick in their prices," noted Rajani Sinha, chief economist at CAREEdge Ratings.
Sinha added that the sustained inflationary trend in some non-perishable food categories, such as cereals, pulses and spices raises concerns about the potential broadening of price pressures due to their inherent stickiness.
Climatic factors have played a major role in veg-protein based item prices recently, according to Soumya Kanti Ghosh, group chief economic adviser at State Bank of India. Evolving food prices will determine domestic inflation in the coming months, he said.
According to SBI's research, CPI inflation is expected to remain below or close to 5 per cent in the remaining months, except September. For the whole of the current financial year, it sees CPI inflation likely averaging 4.6-4.7 per cent.
While domestic food inflation will be closely watched by the monetary policy committee, it will also be keeping a tab on the moves of the US Federal Reserve.
"With US inflation having declined by 0.1 per cent from May, putting the 12-month rate at 3 per cent, around its lowest level in more than three years, is creating grounds for Fed rate cut by September," said Ghosh. He feels RBI will revisit its policy stance around that time.
Monsoon this year is expected to be good. However, the temporal and spatial distribution and the progress of kharif crop sowing would be critical factors to monitor, said CARE's Sinha. A good monsoon would be crucial for ensuring a good kharif harvest and in turn in controlling food inflation.
"We expect food inflation to moderate going ahead as the base effect plays out and new harvests arrive in the market. Expectations of a normal monsoon improve the outlook of food inflation," said Sinha.
She is expecting inflation to average 4.8 per cent in the current financial year and if food inflation moderates, the RBI could cut rate by 50 basis points in two tranches in the second half of the year.
"Since the bottom 50 per cent population incur a larger share of their expenditure on food, a higher food inflation implies these people experiencing a higher inflation than the headline inflation. This coupled with higher rural inflation is a cause of concern both for consumption and investment growth," noted Sunil Kumar Sinha, senior director and principal economist, and Paras Jasrai, senior analyst at India Ratings and Research.
They expect inflation over the next few months to trend under 4 per cent.
"However, high food inflation and uncertainty regarding permanent decline in inflation towards 4 per cent mark are two major issues for monetary policy committee," they added.
While the India Ratings experts see RBI maintaining a status quo on rates in the next MPC meeting in August, the forthcoming budget will play a crucial role in deciding the direction of the monetary policy in future, they felt.
Dharmakirti Joshi, chief economist at CRISIL, also expects a decline in food inflation in the coming months to lower headline inflation to an average of 4.5 per cent. He also doesn't see any interest rate cut in the next MPC meeting as RBI pursues a target of 4 per cent durable inflation.
