Just ahead of the announcement of the Consumer Inflation data for the month of March, which most likely edged up for the fourth month, Reserve Bank of India (RBI) Governor Raghuram Rajan has said that food prices can’t be controlled from the central bank and therefore it is looking to “ward off” spiral inflationary effect.
Rajan further stated that the food inflation should not translate into higher wage inflation, which translates into more food inflation, higher wage inflation and gets into an inflationary spiral. So we can accommodate food inflation, but we are looking to ward off the second round effects.
Although inflation has steadily accelerated from a record low of 4.38 per cent struck in November it remains below the 6.0 per cent upper end of the central bank's target range. Consumer prices likely rose to 5.5 per cent in March from a year earlier compared with February’s 5.37 per cent, as during the last few weeks, unseasonably heavy rain in north and central India have damaged crops, leading to a rise in vegetable and foodgrain prices.
Even though, the Reserve Bank of India has cut interest rates twice this year at unscheduled meetings. Rajan said there is a misconception that if the monsoon is bad this year, and there is higher food inflation, we will miss the inflation target, so you raise interest rates like a maniac to try and bring inflation under control. He added that one of the tenets of monetary policy is to accommodate supply shocks, but we also need to make sure we ward off second round effects. Under a new inflation management policy the government will set an inflation target for RBI to achieve.