Food prices pose risk to aligning inflation to 4% target: RBI officials

High frequency data shows the prices of several food items including cereals, pulses and onions already firming up this month, officials write in RBI Bulletin article

The only risk to the Reserve Bank of India (RBI’s) “resolve to align headline inflation with the target of 4% is food inflation”, with high frequency data showing the prices of several food items already firming up this month, central bank officials wrote in an article in the November edition of the RBI Bulletin.

“Several constituent prices are already firming up – onions; tomatoes; cereals; pulses; and sugar – with the potential to disrupt the gains made in the last two months. Accordingly, in the RBI, we are bracing up for upticks in the readings for November and December,” the officials, led by Deputy Governor Michael Debabrata Patra wrote on the ‘State of the Economy’. 

Observing that inflation readings of about 5% and 4.9% in September and October, respectively, had provided a “welcome relief from the average of 6.7% in 2022-23 and 7.1% in July-August 2023,” they cautioned that the economy was, however, ”not out of the woods yet” on inflation and had “miles to go”.

Noting that the outlook on food inflation was “beset with uncertainties”, they pointed to the fact that “high frequency food price data for November (up to 13th) indicate that cereal and pulse prices have increased further”. Also, among “key vegetables, a sharp increase was observed in onion prices, with tomato prices also showing some firming up,” they added.

On the growth front, the officials said the momentum of the change in Gross Domestic Product (GDP) in India was sequentially expected to be higher in the ongoing fiscal third quarter, with festival demand remaining “ebullient”. 

“Investment demand appears to be resilient with the government’s infrastructure spending, an uptick in private capex, automation, digitalisation, and indigenisation providing a boost,” they said.

Asserting that India’s external sector remained viable, with a modest current account deficit (CAD) financed by resilient capital flows, one of the least volatile currencies in the world and a healthy level of foreign exchange reserves, they said the momentum of growth had picked up.

Pointing out that the estimates of GDP for the second quarter of 2023-24 would be released at the end of this month, they said there was wide consensus supported by nowcasts that real GDP growth would outperform the projections of the RBI pegged at 6.5% for the quarter. 

“The RBI’s projections incorporated a turnaround in the momentum of activity into expansion in Q2 and hence the consensus, if actualised, would imply a stronger pace of activity than projected. This optimism appears to have been corroborated by corporate results for Q2,” they said.

Tightening financial conditions, however, posed a major risk to the global outlook, with the recent spike in bond yields indicative of further impending pass-through to borrowing costs, the officials wrote. 

“Overall, investors worry about shrinking fiscal space, given soaring deficits and debt levels as well as higher debt servicing costs in a high interest rate environment. International trade is weighed down by the strong U.S. dollar and the post-pandemic rebalancing of consumption. Weak exports are a drag on growth across the world,” they added.