(Bloomberg) -- Repeated food price shocks are pushing up India’s inflation rate and it may “run out of control” if monetary policy is eased early, according to Reserve Bank of India Deputy Governor Michael Patra.
The recent moderation in core inflation, which excludes volatile food and fuel prices, is the result of the central bank’s policy, Patra wrote in the RBI’s August bulletin published Monday. Monetary policy is the “only active disinflationary agent in the economy,” he said.
In the article titled, ‘Are Food Prices Spilling Over?,’ Patra said high food inflation is impacting other non-food components. “If high food inflation persists, however, a more cautious monetary policy approach is warranted to squelch the propagation of food inflation pressures into a more generalized inflation.”
The RBI has kept its policy rate unchanged for over 18 months. In its latest policy review, the authority said it wants to prevent second round effects of persistent food inflation on overall prices. Inflation slowed in July to below its target for the first time because of statistical reasons, though the central bank sees it climbing back again from September.
“The conventional treatment of food price perturbations as transitory in the setting of monetary policy is increasingly becoming untenable,” Patra said, countering a suggestion in the government’s economic survey last month that the RBI should leave out food inflation from its target since food prices are determined by factors outside its control.
READ: India’s RBI Must Retain Focus on Food Inflation, Economists Say
Separately, in the State of the Economy report that’s part of the same bulletin, the RBI said aggregate demand conditions are improving in the economy, while rural consumption is reviving because of growing incomes. This revival should allow the private sector to increase spending, it said.
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