Food Price Rise Underscores Need For Guarded Approach By RBI, Govt: Finance Ministry Report

The ministry in its report also said that core inflation has also been softening since the beginning of the June 2023 quarter, indicating a restoration of overall price stability in the economy. 

The Ministry of Finance on Thursday said the recent spike in the prices of food prices in June underscores the need for a guarded approach by the RBI and the government. The ministry in its June monthly economic report also said that core inflation has also been softening since the beginning of the June 2023 quarter, indicating a restoration of overall price stability in the economy. 

"Inflation has significantly declined in the June 2023 quarter compared to the corresponding quarter last year and has entered the tolerance band of the RBI. The core inflation has also been softening since the beginning of the June 2023 quarter, indicating a restoration of overall price stability in the economy," the monthly economic report said. 

"A rise in the prices of ‘fruits,’ ‘vegetables,’ and ‘pulses and products’ owing to weather-related disruptions increased CPI-Food inflation from 3 per cent in May 2023 to 4.5 per cent in June 2023, underscoring the need for a guarded approach by RBI and the government," it further said. Adding that while threats of supply-side shocks, including El Nino, persist, the RBI and the government continue to be guarded for appropriate and timely policy response.

The government data released on July 12 showed India's headline retail inflation rate broke a four-month declining trend in June and surged to 4.81 per cent from 4.31 per cent in May. The increase was primarily driven by a sharp rise in food inflation, which climbed to 4.49 per cent from 2.96 per cent. Subsequently, prices, particularly of tomatoes, have continued to rise even further, prompting the government to implement supply-side measures to alleviate the situation and provide subsidied tomatoes in certain areas. 

According to a MoneyControl report, economists are anticipating a steeper increase in Consumer Price Index (CPI) inflation for July, with data scheduled to be released on August 14. It is expected to breach the RBI 2-6 percent tolerance band for the first time in five months.

The Monetary Policy Committee (MPC) of RBI will announce its interest rate decision on August 10 ahead of the statistics ministry's release of inflation data for July. The committee is widely expected to maintain the repo rate at 6.5 per cent for the third consecutive meeting, the report said. However, there is a possibility that some economists may not completely rule out the chance of a surprise rate hike.

On Thursday, the Finance Ministry's monthly review also said that India's growth prospects for FY24 remain promising, bolstered by favorable monsoon showers, robust fiscal performance, steady growth in the manufacturing and services sectors, and substantial capital expenditure by both public and private sectors.

"Indian economy’s domestic dynamics continue to be strong. Real GDP growth data for the last quarter of FY23 reaffirmed the ability of the Indian economy to grow on the strength of its domestic demand and investment despite a rise in global uncertainties and moderation in global output," it said. 

The report also outlined the importance of fiscal consolidation along with the narrowing of current account deficit for avoiding the challenge of a rising twin deficit.

"The government's progress towards achieving its fiscal target for the year, along with the presence of favourable external sector indicators during the June 2023 quarter, reaffirm the macroeconomic stability of the economy. While both the merchandise exports and imports contracted during the June 2023 quarter, the decline in imports was larger than the fall in exports in absolute terms, leading to a narrower merchandise trade deficit on a YoY basis. A smaller merchandise trade deficit and a consistent service trade surplus augur well for a narrower current account deficit in relation to GDP during the June 2023 quarter," the review said.

"Increased digitisation drive, growing preference for remote working and increased proliferation of Global Capability Centres are expected to further increase India’s services exports. Accompanied with an easing of supply chains and a decline in global commodity prices, the trade deficit is expected to improve further in the coming year."