Gokarn blames structural factors for inflation

MUMBAI: The Reserve Bank of India has said the current surge in food prices is largely due to structural factors, which has complicated the monetary policy making process for the central bank.

“When we take into consideration the impact of structural food price shocks such as the ones India is experiencing, the policy implications become complex,” said RBI deputy governor Subir Gokarn at a conference in Mumbai. “Monetary instruments, when used to deal with these price shocks, have no immediate impact on the price fluctuation, as they are due to structural reasons,” he added.

The deputy governor’s comment immediately pushed up the bond yields by 2 basis points in the morning, as traders read his comments as a sign of further rate hike by the central bank in the coming monetary policy.

Rising income in India over a period of time has resulted in a change in consumption pattern which is skewed towards key protein sources, such as pulses, followed by milk and milk products , eggs and fish. Their volatile supplies have put an upward pressure on headline inflation.

“Rise in income has increased the share of proteins in peoples’ diet. Rising affluence has also led to an increase in demand for proteins and nutrition,” He also said: “Persistent price increases in commodities for which there are less effective substitutes, with other things remaining equal, will raise the potential rate of inflation over a period of time,” He explained. He essentially referred to pulses like Tur and Arhar, which are unique to Indian geography and thus have no substitutes.

Mr Gokarn concluded by suggesting that policymakers need to adopt other non-monetary measures to address the problem. He suggested that the production of the major pulses and other sources of protein should be increased to meet the burgeoning demand, in a similar fashion as the white and green revolution succeeded in doing, in the case of milk and wheat.