Food costs, which make up almost half of retail inflation, increased 5.66 per cent in August after rising 5.42 per cent the month before.
In its monthly report on Friday, the central bank stated that although food price volatility can be problematic, India’s headline inflation may average 4.5% in the second half of the fiscal year thanks to lower crude oil prices.
The RBI stated, “Some vegetable price shocks have begun to reverse, and if this continues and broadens, the persistence that characterised food inflation developments in the first quarter of 2024-25 may be behind us.”
In August, retail inflation in India was 3.65%, higher than the corrected 3.60% in July due to a spike in vegetable costs.
Almost half of the retail inflation is attributed to increases in food costs, which increased 5.66 per cent in August after climbing 5.42 per cent the month before.
With a tolerance band of two percentage points on either side, the RBI targets inflation at 4%.
According to the RBI, September’s inflation figure could be “haunted” by an adverse base impact. Further, the RBI reported that when headline inflation starts to decline, household consumption is expected to expand faster in July–September.
It is anticipated that the RBI will proceed cautiously with monetary policy easing after maintaining its benchmark interest rate for the ninth consecutive meeting in August. The RBI also notes that global economic challenges and sluggish disinflation trends add to the caution in its monetary policy approach.
Its next meeting on monetary policy is set for October 7-9. The central bank observed that although lenders continue to largely rely on certificates of deposit to cover funding needs, the gap between banks’ credit and deposit growth is starting to close.
The central bank stated, “Non-banking financial companies (NBFCs) are increasingly turning to offshore bonds.”
“Microfinance institutions are facing some asset quality issues, warranting slowing down the pace of loan growth.”
In a separate piece in the bulletin, the RBI stated that NBFCs must continue to be aware of the fast-changing financial landscape as well as the risks associated with climate change and cyber-security.
To maintain financial stability, it is “incumbent” upon NBFCs to proactively identify and manage risks and to strengthen their assurance operations.