High food inflation a challenge to monetary policy: RBI

High level of food inflation in the country still remains a challenge for monetary policy although headline inflation has started to soften after staying in double digit for five months up to July 2010, the Reserve Bank of India said today.

Food inflation remains disconcertingly high despite a normal monsoon while inflation in non-food manufactured products, though above its medium-term trend, has shown some moderation, RBI said in its review of macroeconomic and monetary developments for the fiscal second quarter.

While this can be attributed partly to a change in the consumption pattern in favour of protein-rich items, such as egg, milk, fish and meat where price increases have been high, the spike has defied logic as it comes amidst relatively tight liquidity, RBI noted.

The transfer of liquidity from the markets to the government in the wake of the 3G/BWA auctions tightened overall liquidity conditions in the economy in May this year. Since then, liquidity conditions have generally remained in deficit mode consistant with RBI's monetary policy stance.

RBI raised its policy interest rates five times since the beginning of March 2010, raising the repo rate by 125 basis points and the reverse repo rate by 175 basis points.

RBI said this asymmetric tightening narrowed the policy corridor from 150 basis points to 100 basis points.