Reserve Bank of India (RBI) Deputy Governor Michael Patra. File
| Photo Credit: Reuters
The momentum of food prices at 2.5% in July, over and above the momentum of 2.7% recorded in June, indicates continuing build-up of underlying price pressures within the food group, Reserve Bank of India (RBI) officials led by Deputy Governor Michael Debabrata Patra wrote in the State of the Economy chapter published in the August issue of the RBI Bulletin.
Observing that the moderation in headline consumer price index (CPI) inflation in July to a level below the RBI’s target of 4% “was primarily due to the downward statistical pull of large base effects”, the officials said this had concealed the strong price build-up in the food category.
“The price momentum in the food category in the CPI in July was much higher than long period averages. This has also propelled CPI headline momentum above trend. The vegetable price shocks that started in June 2024 continued unabated in July,” they wrote, underlining the concern monetary policy makers expressed while holding interest rates earlier this month.
The officials also pointed to the fact that key food items like pulses were exhibiting double digit inflation along with elevated cereals inflation.
“Core inflation registered an uptick after registering a period of sustained sequential softening between June 2023 to May 2024, primarily reflecting the impact of mobile tariff revisions. These developments impart an upside to the overall inflation outlook,” they emphasised.
“Persistent food inflation is spilling over through general inflation expectations to costs, services charges and output prices, although this fuller impact is offset by monetary policy,” the RBI said in its synopsis of the article, adding that monetary policy vigil was warranted so as to prevent the generalisation of inflationary pressure, so as to help “preserve and strengthen the foundations of a high growth trajectory”.
Stating that headline inflation, as measured by year-on-year (YoY) changes in the all-India CPI, moderated sharply to 3.5% in July from 5.1% in June, the RBI officials noted that the 154 basis points fall in inflation was on account of a favourable base effect of 2.9%.
Food inflation (YoY) declined to 5.1% in July, from 8.4% in June, driven by a favourable base effect of 5.7% which more than offset a strong momentum.
“Vegetable prices inflation declined precipitously to 6.8% in July from 29.3% in June, recording its first single digit print in nine months. This was disproportionately driven by tomato prices,” they wrote. Despite a month-on-month (MoM) price increase of 41.8% in July, YoY inflation in tomato prices plummeted on account of the base effect of the unprecedented price increase of 214.3% recorded a year earlier, they stated.
Observing that a strong pick-up in momentum to 0.5% in July from 0.1% in June contributed to the increase in core inflation, they said while inflation increased in the transport and communication sub-group (primarily on account of increase in mobile tariffs) and personal care and effects, it remained steady for sub-groups such as clothing and footwear, housing, and health.
Asserting that aggregate demand conditions were gathering momentum with a revival in rural consumption on the back of growing incomes, they said this stimulus to demand was expected to reinvigorate the hitherto subdued participation of the private sector in total investment.