Food inflation carries a weight of around 46 percent in the CPI basket, contributing to more than 75 percent of headline inflation in May and June. Vegetable prices contributed about 35 percent to inflation in June.
“With this 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. Therefore, we cannot and should not become complacent merely because core inflation has fallen considerably,” Governor Das said Thursday.
The central bank maintained the status quo in terms of both the repo rate and its stance of “withdrawal of accommodation”, while its commitment remains on price stability which would lay the “foundations for a sustained period of high growth”.
The headline inflation measured by the Consumer Price Index rose to 5.1 percent in June due to higher-than-expected food inflation, while core inflation moderated to a historic low in May and June backed by deflation in fuel prices for the tenth consecutive month.
“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. It 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,” Das said.Moreover, high food inflation adversely affects household inflation expectations, which have a significant impact on future trajectory of inflation.Household inflation expectations, after moderating between May 2022 and September 2023, have risen on the back of high food inflation since November last year.
“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,” Das added.
He said the high food price momentum was likely to have continued in July, while relief is expected now given the pick-up in the south-west
monsoon and healthy progress in sowing. Buffer stocks of cereals continue to be above the norms.
On Thursday, RBI kept the inflation projection unchanged at 4.5 percent for FY25, with the second quarter inflation likely at 4.4 percent, third quarter at 4.7 percent; and fourth quarter at 4.3 percent.