While the monetary policy can absorb the current round of transitory inflation, Reserve Bank of India is on guard to ensure that it does not become generalised and persistent, Governor Shaktikanta Das said on Wednesday.

“Given the likely short-term nature of the vegetable price shocks, monetary policy can await the dissipation of the first-round effects of such shocks that may produce short-lived spikes in headline inflation. We will remain on guard to ensure that second order effects in the form of generalisation and persistence are not allowed to take hold,” he said.

The remarks were part of Das’ address at the 29th Lalit Doshi Memorial Lecture titled ‘Building Blocks for a Sustainable Future: Some Reflections’.

Frequent incidences of recurring food price shocks pose a risk to anchoring of inflation expectations, which has been underway since September 2022. However, the central bank will remain watchful, Das said, adding that continued and timely supply side interventions are critical to limiting the severity and duration of such shocks.

It is then necessary to be watchful of any risk to price stability and act appropriately and in time, he said, reiterating RBI’s focus on aligning inflation to the 4.0 per cent target.

“Price stability has to form the basis of sustainable growth. Without price stability any growth you try to achieve in the short term, will only have a short life. So, price stability is absolutely essential for maintaining the momentum of growth and sustaining the country’s GDP growth,” Das said.

After reaching a low of 4.3 per cent in May 2023, headline inflation rose to a higher than estimated 7.4 per cent in July driven by a surge in tomato and other vegetable prices which rose 37.3 per cent on year. Food inflation more than doubled from 4.7 per cent in June to 10.6 per cent in July.

Vegetable prices

Das said that the spike in vegetable prices too is starting to see a correction and the RBI expects an appreciable slowdown in vegetable inflation September onwards. However, deficit rainfall, uncertainty around weather events such as El Niño, and renewed geopolitical tensions continue to impart uncertainty to food prices outlook.

On the other hand, core inflation softened to 4.9 per cent in July, down 130 bps from the peak in January 2023. “This steady easing of core inflation over the last five months is indicative of the ongoing transmission of monetary policy,” Das said.