Context
According to recent reports, officials from the Reserve Bank of India (RBI), led by Deputy Governor Michael D. Patra, have warned that food price volatility remains a potential risk to India’s economy, even as consumer price inflation has remained below the central bank’s target of 4% for the second consecutive month.
Current Inflation Trends
- India’s retail inflation was at 3.65% in August, higher than the revised 3.60% in July, as vegetable prices soared.
- Food prices, which account for nearly half of the retail inflation basket, rose 5.66% in August, compared with a 5.42% climb in the previous month.
- The RBI, which kept its key interest rate unchanged for the ninth straight meeting in August, is expected to proceed cautiously with monetary policy easing. Its next monetary policy meeting is scheduled for Oct. 7-9.
Risks Posed by Food Price Volatility
- However, while the overall retail inflation has been low and within the target in the current fiscal, the RBI officials have warned that inept food prices are an uncertainty.
- The food inflation accounted for by vegetables has revealed that some of the shocks have started to unwind and, if this unloading gathered pace and extended, the persistence which characterized food inflation developments in the first quarter of 2024-25 might have passed.
- But the RBI also hinted that an unfavourable base effect could ‘haunt’ September inflation numbers.
- The RBI expects that India’s average headline Inflation may be 4.5 percent in the second half of the current fiscal year, due to lower crude oil prices although fluctuating food price will remain a concern.
Impact on Household Consumption and GDP Growth
- Personal expenditure is likely to expand at a faster pace in the second quarter of the year ending September as headline inflation softens, said the RBI bulletin.
- The central bank has also estimated better GDP growth for FY25, and positive going consumption trend-wise.
Challenges Faced by NBFCs and Microfinance Institutions
- It also focused on the future issues which NBFCs and microfinance institutions are going to face in the existing economic environment, according to the RBI bulletin.
- Banks credit and deposit figures seem to be converging with lenders still heavily dependent on certificate of deposit to fund their activities.
- Thus, as the competition for NBFCs grows stiff, they are moving more towards offshore bonds for funding.
- Microfinance institutions are still producing some asset quality problems, which will require reducing the rate of growth in loan portfolios.
- The RBI has advised NBFCs to be aware of the dynamic nature of the financial market and risks related to cyber threats and climate.
Proactive Risk Management by NBFCs
- Thus it is “incumbent” on NBFCs to mitigate risks and also strengthen the assurance measures so as to remain financially sound – as per the RBI Bulletin.
- The Reserve Bank of India has highlighted that NBFCs have to be cautious and take precautionary steps in this kind of economic environment.
Global Economic Slowdown
- There was also this statement in the RBI bulletin that the global economic activity is now decelerating, which may spell bad news for the Indian economy.
- International trends affecting India and indicators of its GDP and inflation rate will most likely be under the main focus of the central bank in the coming months.
Conclusion
Although retail inflation in India has emerged lower than the 4 percent target set by the RBI for two months continuously, the officials have said that food price inflation has conditional upside risks. The RBI has estimated a higher GDP growth in FY25 on a better consumption front but has also spelled out the difficulties that NBFCs and microfinance institutions are facing.The central bank has called for enhanced risk management by NBFCs and has pointed to a decline in global economic activity. Since the RBI is gradually going for monetary policy relaxation, it will be essential for the central bank to adopt an optimum mix of increase in consumption demand and control of inflationary pressures in the anticipation of such risks and or shocks emanating from food price inflation and other structural factors.
Source: The Hindu