Country's headline inflation is expected to firm up further in the coming months largely due to disruptions in food and manufactured items' supply chains, the Reserve Bank of India said in its annual report for 2019-20 released on Tuesday.
The Reserve Bank of India (RBI) said headline inflation picked up strongly during the closing months of 2019-20 and the short-term outlook for food inflation has turned uncertain.
"Disruptions in food and manufactured items' supply chains could amplify sectoral price pressures, thus posing an upside risk to headline inflation. Heightened volatility in financial markets could also have a bearing on inflation," said the RBI Annual Report 2019-2020.
All of these may influence inflation expectations of households, which are adaptive in nature, and show significant sensitivity to shocks to food and fuel prices, the report said.
Monetary policy, therefore, has to keep a constant vigil on price movements, especially as they can translate into generalised inflation.
According to government data, retail inflation rose to 6.93 per cent in July, mainly driven by rising prices of food items like vegetables, pulses, meat and fish.
In its monetary policy review earlier this month, RBI had said that the retail inflation is expected to be at elevated levels during the second quarter, but may ease in the second half of the current fiscal year.
Supply chain disruptions persist, resulting in inflation pressures across segments, RBI Governor Shaktikanta Das said while announcing the decisions taken by the central bank's Monetary Policy Committee (MPC) on August 6.
Going by the trend of global commodity price developments and weak demand conditions, consumer price inflation remained benign during 2019 and early 2020 in a number of economies the overall headline inflation was subjected to higher volatility in 2019-20 relative to the previous four years, underpinned by high flux in food prices, RBI said.
Within the food group, price spikes for different items occurred at different time points. The seasonal behaviour has changed in the case of prices of many food items such as, onion, ginger, brinjal, cauliflower, okra and green peas.
Interestingly, despite being the most volatile item, seasonality in onion prices has declined significantly over the years, partly reflecting improvement in cold storage facilities, RBI said.
"As the COVID-19 pandemic spread across the globe, all commodity prices dipped. The shutdown of industries in China in February 2020 and later in Europe and the US led to a fall in demand for metals, easing their prices.
"Prices of food items like palm oil, soy oil, sugar and corn also declined with retrenchment in demand for ethanol and bio-diesel as crude oil prices declined," the report said.