Retail inflation will return to the central bank's comfort band of 2%-6% as vegetable prices soften, according to a member of India's Monetary Policy Committee (MPC), who said the trajectory of inflation will be clearer once the recent spike ebbs.
The spike in prices of items like tomatoes has been "unprecedented" but normally there is a seasonal softening in vegetables after a shock (price spike), said Ashima Goyal, an external member of the Reserve Bank of India (RBI) committee, in an interview with Reuters late on Thursday.
"I do not think inflation will be out of our comfort band once vegetable prices soften," she added.
Led by vegetables, food inflation in India soared to an over 3-year high of 11.5% in July. This pushed retail inflation to 7.44%, above the RBI's comfort band.
The data came after the six-member MPC held policy rates steady at its meeting earlier this month. On Wednesday, RBI governor Shaktikanta Das said he expected vegetable prices to start easing by September.
The cost of cereals, pulses and spices has also risen, prompting a rush of supply-side measures by the government.
"Inflation in cereals has been there since the Ukraine war, but it has been managed," Goyal said. "We don't really expect it to sustain and the government has a lot of supply-side arsenal there, via stocks, trade etc."
Goyal expects the government, which has fiscal deficit target of 5.8% of GDP in 2023-24, to remain fiscally prudent even as it takes these measures.
Steps such as reducing fuel prices, which will impact oil marketing companies more than government finances directly, can help improve household inflation expectations, she said.
Earlier this month, the RBI tightened liquidity by imposing an additional cash reserve requirement on banks, pushing short-term interest rates above the repo rate of 6.5%.
In the minutes published on Thursday, RBI deputy Michael Patra said the tightening liquidity should be the central bank's priority as it presents a direct threat to its resolve to bring India's inflation within the target.
"Under this inflation targeting framework, liquidity cannot be tightened to a point that short-term rates rise above the repo rate mandated by the MPC," said Goyal.
"If you want to raise rates, raise the repo rate," she added.
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