Food price volatility remains a ‘contingent risk’ to CPI inflation: RBI

The Reserve Bank of India (RBI) released its monthly bulletin on Friday (September 20) in which it said food price volatility continued to pose a potential risk even as the inflation measure, the Consumer Price Index (CPI), fell below the central bank’s target for the second time in August.

“Consumer Price Index (CPI) inflation was below the Reserve Bank of India’s target for the second consecutive month in August, although food price volatility remains a risk given recent experience,” the Reserve Bank of India (RBI) said in its State of the Economy paper.

The Reserve Bank of India also noted that the slowdown in global economic activity and slow disinflation make monetary policymakers cautious.

“Global economic activity is slowing and the pace of disinflation remains sluggish, prompting monetary authorities to remain cautious,” the RBI said in a statement.

According to an RBI statement, domestic drivers of the economy such as private consumption and gross fixed investment were strong and the country’s net exports remained sequentially positive, supporting India’s gross domestic product (GDP) in the first quarter of fiscal 2024-25.

The CPI remained unchanged in July and August, coming in below the RBI’s target for the second month in a row in the August reading, while some price shocks in the vegetable market started to subside.

“Some of the vegetable price shocks have started reversing and if this continues and broadens, the persistence that characterised the food inflation development in the first quarter of 2024-25 may be behind us,” the Reserve Bank of India said. The central bank warned that an unfavourable base effect could haunt the September figure.

The inflation estimate of an average of 4.5% in the second half of the 2024-2025 financial year, set out in the August 2024 Monetary Policy Committee resolution, has “improved”.

RBI Articles

Apart from the State of Economy article, an RBI article titled Priority Sector Lending: The Indian Experience by Sambhavi Dhingra, Arpita Agarwal and Snehal S. Herwadkar highlights that priority sector lending is being used as a tool to channel credit to sectors that need assistance.

“Priority Sector Lending (PSL) in India has been used as a policy intervention tool to direct credit to needy sectors of the economy. This paper assesses the commercial feasibility of such lending and its impact on the overall financial health of banks, using quarterly bank-level data from March 2006 to March 2023.”

The RBI also published two other articles as part of the September issue. Synchronisation of the Business Cycle of Indian States and Peeling the Layers: A Review of the NBFC Sector in Recent Times are the two issues of the September RBI Bulletin, according to the central bank’s website.