Volatility in food prices remains a contingent risk even as India's retail inflation for August came in below the Reserve Bank of India's target, the central bank said on Friday in a bulletin.
"The prospects of headline inflation averaging 4.5% in the second half of the fiscal 2024-25, as set out in the August 2024 resolution of the monetary policy committee, have improved," the RBI paper titled State of the Economy said. "Nonetheless, in light of the recent experience, food price volatility remains a contingent risk."
In August, India's headline inflation rose to 3.7% from 3.6% in July. This was the second consecutive month wherein inflation was under the RBI's target. The RBI has an inflation target of 4%, with a leeway of 2 percentage points on either side. Food inflation was up to 5.3% in August from 5.1% in July.
Despite economic activity slowing down globally amid a sluggish pace of disinflation, India's domestic drivers remained robust. While the underperformance of agriculture was compensated for by a buoyant manufacturing sector and resilient services, household consumption is set to grow faster in July–September as headline inflation eases amid revival in rural demand.
While some vegetable price shocks have begun to reverse, and if this continues and broadens, the persistence that characterised food inflation developments in April–June may be behind us, the RBI paper said.
However, an unfavourable base effect may haunt the September food inflation numbers.
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