Dovish India Rate-Setter a Little Surprised by Food Inflation

(Bloomberg) -- Food prices, particularly edible oils and some grains, have risen more than India's monetary authorities had expected, according to a dovish member of its rate-setting committee.

“On the overall inflation, there was an expectation that energy prices in general would be affected,” Shashanka Bhide, an external member on the central bank's Monetary Policy Committee and an agricultural economist, said in an interview on Wednesday. “But in case of food, it has been a little bit of a surprise.”

India's headline inflation surged more than anticipated to near 7% in March, stoked by higher prices of food items such as edible oils, cereals and vegetables. While the spillover from Russia's invasion of Ukraine is fanning fertilizer, food and fuel price shocks globally, the South Asian nation -- the world's biggest importer of palm, soybean and sunflower oils -- faces a further spike in consumer prices from Indonesia's surprise decision to ban exports of cooking oils.

There is not enough time left to ramp up domestic edible oil production, said Bhide, who earned a PhD in agricultural economics at the Iowa State University.

India's benchmark 10-year bond yields rose 2 basis points to 7.17% on Friday, taking its four-day increase to 13 basis points.

While policy makers were expecting a good harvest of winter-sown crops to have a moderating impact on food prices, unprecedented heatwave conditions are now threatening the wheat crop output in a country that's the world's second-biggest producer of the staple food grain.

“The situation again has changed somewhat,” Bhide said. This underlines how any small changes in the supply side can cause “significant impact overall,” he added.

The developments risk making obsolete the Reserve Bank of India's latest inflation forecast that sees prices peaking at 6.3% in the current quarter ending June, and easing from thereon to average 5.7% in the full-year to March.

Bhide suggested fiscal interventions by the government to avoid “sharper” pass through to consumers. His rate-panel colleagues, Jayanth R. Varma and Ashima Goyal, said in separate interviews that the MPC is free to raise interest rates amid concerns that faster inflation may dent a demand recovery in Asia's third-largest economy.

Here are some more excerpts from the interview:

High inflation in several countries will have a moderating impact on demand, and will check the second-round effects of inflation. But “that is more likely to happen over a medium term and not immediately,” Bhide said
“External shocks have exacerbated the situation, and therefore, several interventions in terms of policy would be required to moderate these pressures”
“We have systems in place to deal with another wave of Covid. And therefore, the normal instruments of policy will have to be used in order to achieve our goals.” Repo rate is “obviously, one of the instruments that is available as far as monetary policy is concerned,” he added
“Monetary policy alone cannot achieve all the objectives. It is the goal of the MPC to keep inflation at moderate levels, and that have to be addressed now,” Bhide said. “We certainly don't want to miss the target. It is not in anybody's interest to do that”