Indicating that monetary action would be a necessity to tame inflation when it reviews the monetary policy on Tuesday, the Reserve Bank of India on Monday said that inflation “remains elevated at beyond the comfort level”, despite having a normal monsoon.
“Current trends suggest a possible ratchet effect, with food inflation appearing sticky and somewhat impervious to generally expected favourable impact of a normal monsoon, thus posing a key risk to the overall inflation environment,” the Reserve Bank stated in its half-year review of Monetary Policy 2010-11.
The persistence of food inflation not only has adverse welfare effects as the poor have larger share of food in their consumption basket, but could also impact the core inflation after a lag, causing a generalisation of price pressures. Another important risk to inflation could emanate from the recent upward momentum witnessed in the global commodity prices, which could partly get imported even with record domestic production, as has been the case for cotton.
“Food inflation remains disconcertingly high despite a normal monsoon. This can be attributed partly to a change in the consumption pattern in favour of protein-rich items, such as, egg, milk, fish and meat where price increases have been high. in recent months, elevated inflation remains a challenge for monetary policy,” the RBI added.
Further it stated that the uncertain global outlook, and the dominance of supply rigidities in certain sectors that impart rigidity to the inflation path, pose greater challenge for monetary policy in its objective of anchoring inflationary expectations without hurting growth.
IMF projection
The momentum of global recovery, which exceeded expectations in the first half of 2010, has slowed down in the last few months. According to IMF projection, the temporary slowdown in the pace of global growth in the second half of 2010 could extend up to the first half of 2011.
In advanced economies, the weakening of recovery has raised concerns about both unemployment and deflation.
With capacity for fiscal stimulus already stretched and given the concerns about sovereign debt, further quantitative easing seems the preferred option to address the weakness in growth.
