India cenbank chief: to remain watchful of inflation; look through short-term shocks

By Nikunj Ohri and Swati Bhat

NEW DELHI (Reuters) - India's monetary policy committee will remain watchful of the evolving inflation situation but the recent spikes in vegetable prices would start ebbing going ahead, the Governor of the Reserve Bank of India Shaktikanta Das said on Tuesday.

"Given the likely short-term nature of the vegetable price shocks, monetary policy can await the dissipation of the first-round effects of such shocks which may produce short-lived spikes in headline inflation," Das said in a speech at the Delhi School of Economics.

India's annual retail inflation rose sharply to 7.44% in July from 4.87% to touch its highest level since April 2022 and breach the central bank's 2% to 6% comfort band for the first time in five months.

"We remain on guard to ensure that second-order effects in the form of generalisation and persistence are not allowed to take hold," Das said.

He said the frequent incidences of recurring food price shocks pose a risk to anchoring of inflation expectations, which has been underway since September 2022 and that the central bank would remain watchful of it.

Das also reiterated the criticality of the role of continued and timely supply side interventions by the government in limiting the severity and duration of such food price shocks.

"In these circumstances, it is necessary to be watchful of any risk to price stability and act timely and appropriately. We remain firmly focused on aligning inflation to the target of 4.0%," Das said.

Vegetable prices in India have already begun to soften and are likely to decline from September, Das had said in a speech last month.

A Reuters poll however, predicts India's inflation rate will remain above the Reserve Bank of India's upper tolerance band of 6% at least until October.

The central bank chief also said the level of surplus funds in the banking system is a challenge for monetary policy and that ideally the overnight interbank cash rates must be aligned with the policy repo rate of 6.5%.

(Reporting by Swati Bhat; Editing by Shounak Dasgupta)