RBI should focus on softening core inflation: MPC's Shashanka Bhide

India’s central bank must stay focused on moderating components of inflation that are not directly influenced by food or fuel, and work on dampening overall price expectations, said a rate-setter usually known for his dovish views.

“As far as monetary policy is concerned, moderation in the core inflation should be the priority,” Shashanka Bhide, an external member of the Reserve Bank of India’s monetary policy committee, said in an emailed interview Friday, referring to the gauge that strips out volatile food and energy prices. “It is important that the inflation expectations are anchored closer to the policy target.”

While the debate on India’s inflation centers around the headline consumer price inflation, it is the core measure that has troubled policymakers for years. Despite raising its main policy rate by 190 basis points this year, the RBI failed in its mandate to keep the retail number within its targeted 2%-6% range for nine straight months. More worryingly, the core measure has stayed above 6% for at least a year.

“The food and fuel inflation are driven by the supply conditions and inelastic demand,” Bhide said. “They may be more responsive to other policy measures. But it is also necessary to weaken their impact on the price conditions in the other sectors.” 

He said the September headline inflation print of 7.4%, a five-month high, wasn’t “entirely a surprise,” adding that price gains should slow to less than 6% by end of March.

The six-member MPC “should be looking at positive real rates over the medium term” but policymakers also “need to be cognizant of the growth trends,” said Bhide. Unlike his colleague in the panel Jayanth Rama Varma, who favored the peak interest rate to be around 6%, Bhide didn’t want to be specific about his terminal rate expectation.

Food and vegetable prices constitute nearly half of the CPI basket. Fuel prices, another important component for the economy and fiscal health, have shot up due to the ongoing war in Ukraine and the ensuing global supply chain disruptions.

While some food price relief could be expected in the coming days due to fresh winter crop, “the commodities to watch would be rice and vegetables at this time,” said Bhide, who earned a PhD in agricultural economics from the Iowa State University. “The concern is also one of sustained price pressures in the case of critical inputs such as energy.”

Here are some more excerpts from the interview:

• “The external economic environment has become less favorable and achieving growth on the back of domestic demand will require moderation in expectations of inflation,” he said
• Global economic conditions such as sharp monetary policy tightening by most central banks, prolonged Russia-Ukraine war with consequences to energy supplies and prices are “significant sources of uncertainty,” that will have implications for “capital flows, balance of payments and inflation as well as growth”
• “To the extent that monetary policy tightening globally has an impact on domestic inflation and growth, it would be a concern. However, it would not be the sole consideration”
• Growth remained the main concern in 2021, and the MPC did not want to act on rates despite indications of inflationary pressures both domestic and imported. However, after the war shock, prioritizing inflation in policy became important. “I do not think it would have been necessary to act earlier”