Food price fluctuations could threaten India's inflation control: RBI

India's inflation control: India's overall inflation rate is projected to average 4.5 per cent during the second half of this fiscal year, supported by lower crude oil prices, though unstable food prices may pose a challenge, according to the Reserve Bank of India ( RBI ) in its latest monthly bulletin released on Friday.

“Some shocks from rising vegetable prices have started to ease, and if this trend continues and broadens, the food inflation issues seen in the first quarter of 2024-25 may soon be behind us,” the central bank noted.

Vegetable prices drive inflation

Retail inflation in India (CPI) rose slightly to 3.65 per cent in August, compared to a revised 3.60 per cent in July, primarily driven by a surge in vegetable prices. Food inflation, which contributes nearly half of the overall inflation figure, increased by 5.66 per cent in August, up from 5.42 per cent in July.

The RBI aims to keep inflation at 4 per cent, with a tolerance band of 2 percentage points above or below this target. However, the central bank warned that an unfavourable base effect could impact the inflation figures for September.

Despite these concerns, household consumption is expected to grow faster during the July-September period as inflation moderates.

The RBI has kept its key interest rate unchanged for nine consecutive meetings, with the next monetary policy review scheduled for October 7-9. Analysts expect the central bank to adopt a cautious approach toward any monetary policy easing.

Credit-deposit gap narrows

The gap between bank credit and deposit growth is narrowing, with banks continuing to rely on certificates of deposit for funding. Meanwhile, non-banking financial companies (NBFCs) are increasingly turning to offshore bonds, the RBI said.

The bulletin also highlighted challenges for microfinance institutions, which are dealing with asset quality issues that could slow loan growth. The RBI advised NBFCs to stay alert to the evolving financial environment, particularly regarding cyber-security and climate risks.

NBFCs must proactively manage these risks while strengthening their internal risk management systems to ensure financial stability, the RBI added.

(With Reuters Inputs)