Reserve Bank of India (RBI) Governor Shaktikanta Das on Thursday said that the central bank can not ignore food inflation while formulating monetary policy.  He said food inflation, with a weight of around 46% in the CPI basket, contributed to more than 75% of headline inflation in May and June and vegetable prices increased sharply and contributed about 35% to inflation in June.  “High inflation pressures persisted across other major food items also. On the other hand, the softening in core inflation continues to be broad-based, with core services inflation touching a new low in the current CPI series during May-June 2024,” the governor said in his monetary policy statement. Stating that high food price momentum might have continued in July, he said large favourable base effects might have pushed headline inflation downwards in July. “The impact of the revision in milk prices and mobile tariffs needs to be watched,” he said. “Continuing food price shocks slowed the process of disinflation in Q1:2024-25. There is also considerable divergence between headline and core inflation. This has brought to the fore the issue of how much importance should the MPC give to food inflation,” he said.  Mr Das said with “high share of food in the consumption basket, food inflation pressures cannot be ignored.”  Further, the public at large understands inflation more in terms of food inflation than the other components of headline inflation, he said adding “Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably.”  Stating that high food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation, he said household inflation expectations, after witnessing a moderating trend between May 2022 and September 2023, have edged up on the back of high food inflation since November 2023.  “Persistently high food inflation and unanchored inflation expectations – if they materialise – could lead to spillovers to core inflation through pick-up in wages on cost-of-living considerations,” he said.  “This, in turn, could be passed on by firms in the form of higher prices for services as well as goods, especially in a scenario of strong aggregate demand. Third, these behavioural changes can then result in overall inflation becoming sticky, even after food inflation recedes,” he said. The governor said “the MPC may look through high food inflation if it is transitory; but in an environment of persisting high food inflation, as we are experiencing now, the MPC cannot afford to do so.”  The MPC has to remain vigilant to prevent spillovers or second round effects from persistent food inflation and preserve the gains made so far in monetary policy credibility, he emphasized.

Answering a question from The Hindu on a suggestion being made in the Economic Survey 2023-24 to delink food inflation from the inflation targeting framework as the RBI has no control over it, he said the National Statistics Office (NSO) is currently undertaking a survey on food price inflation and based on the findings a decision would be taken at the appropriate time by the government and the RBI. “It all depends on what data the NSO survey would throw up,” he said.  

He said the current CPI basket is decided based on the 2011-12 data. Speaking on financial stability Mr. Das said one of the issues that has been attracting our attention is home equity loans, or top-up housing loans, which have been growing at a brisk pace. “Banks and NBFCs have also been offering top-up loans on other collateralised loans like gold loans,” he said.  “It is noticed that the regulatory prescriptions relating to loan to value (LTV) ratio, risk weights and monitoring of end use of funds are not being strictly adhered to by certain entities. I repeat certain entities.” he added. 

“Such practices may lead to loaned funds being deployed in unproductive segments or for speculative purposes. Banks and NBFCs would, therefore, be well-advised to review such practices and take remedial action,” he said.