Anticipated Softening of Vegetable Prices Expected to Ease Retail Inflation, Says RBI's MPC Member

25-08-2023 New Delhi - A member of India's Monetary Policy Committee (MPC) has predicted that retail inflation will soon return to the central bank's preferred range of 2% to 6%, as the softening of vegetable prices takes effect. The trajectory of inflation is expected to become clearer once the recent surge subsides, according to the MPC member.

The recent surge in prices of commodities like tomatoes was described as "unprecedented," but Ashima Goyal, an external MPC member from the Reserve Bank of India (RBI), stated that there usually follows a seasonal decline in vegetable prices following a shock spike. Goyal shared her insights in an interview with Reuters late on Thursday, emphasizing that she believes inflation will not remain outside the comfort band once vegetable prices undergo a softening.

Vegetable-led food inflation in India surged to an over three-year high of 11.5% in July, driving the overall retail inflation to 7.44%, which is above the RBI's comfort range.

The recent MPC meeting held earlier this month maintained policy rates unchanged. RBI Governor Shaktikanta Das stated on Wednesday that he anticipates a reduction in vegetable prices starting from September.

The costs of cereals, pulses, and spices have also risen, prompting the government to implement various supply-side measures.

Goyal expects the government, which aims for a fiscal deficit target of 5.8% of GDP in 2023-24, to remain fiscally prudent even while implementing these measures. She mentioned that actions like reducing fuel prices can positively impact household inflation expectations.

Earlier this month, the RBI tightened liquidity by introducing an additional cash reserve requirement for banks, which pushed short-term interest rates above the repo rate of 6.5%.

In the published minutes on Thursday, RBI Deputy Michael Patra emphasized the importance of prioritizing tightening liquidity, as it directly challenges the central bank's commitment to align India's inflation with its target. Goyal stressed that under the inflation targeting framework, liquidity should not be tightened to the extent that short-term rates surpass the repo rate mandated by the MPC. She suggested that if there is a need to raise rates, it should be done by raising the repo rate.