Food inflation bites Indian economy: RBI sees uptick in vegetable prices; monsoon key determinant of relief

India’s food inflation may have risen further in May 2024, after hitting a four-month high of 8.7 per cent in April from 8.5 per cent in March. Rural consumers are witnessing a sharper uptick of 8.75 per cent, according to data released by the statistics ministry. The soaring food prices, especially those of vegetables and fruits, have been burning a hole in the common man's pocket over climate-related shocks causing a supply deficit.

While announcing the bi-monthly monetary policy earlier today, Reserve Bank of India (RBI) Governor Shaktikanta Das warned that the exceptionally hot summer season and low reservoir levels may induce more stress on the summer crop of vegetables and fruits. The rabi arrivals of pulses and vegetables need to be carefully monitored, according to Das.

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"Global food prices have started inching up. Prices of industrial metals have registered double-digit growth in the current calendar year. These trends, if sustained, could accentuate the recent uptick in input cost conditions for firms,'' said the RBI governor in his statement on Friday, June 7.

Food inflation offsets subdued fuel inflation

India's consumer price index (CPI)-based inflation eased to an 11-month low of 4.83 per cent in April, edging closer to the central bank's target of four per cent. Economists have raised concerns about rising food inflation, which remains a significant driver of overall inflation in India.

Food inflation has been taking a toll on the Indian economy since 2023, with a number of categories witnessing significant inflation. This includes veggies at +28 per cent YoY, pulses at +17 per cent YoY, cereals at +8.6 per cent YoY, meat and fish at +8.2 per cent YoY, spices at +7.8 per cent YoY and eggs at +7.1 per cent YoY.

Notably, fuel inflation dropped to a low of -4.2 per cent YoY in April, making it the eighth consecutive month of negative fuel inflation. This can be credited to the LPG price cuts taken since last year (cut of ₹200/cylinder in August 2023 and ₹100/cylinder in March 2024).

Additionally, the state-owned oil marketing companies (OMCs) are likely to hold the retail prices of petrol and diesel in the first quarter of the current fiscal (Q1FY25) due to changes in their refining margins, Sumit Pokharna, VP-Research Analyst, Kotak Securities told LiveMint.

Economists at ICICI Bank highlighted that fuel inflation is contracting despite strong inflation in the electricity segment (10.2 per cent YoY), which can be attributed to peak demand during the heatwave conditions.

Meat and fish prices rose to 8.17 per cent from 6.36 per cent a month earlier, while fruit prices increased to 5.22 per cent from 3.07 per cent in March. “Among the top five groups, the year-on-year inflation on ‘Clothing & Footwear’, ‘Housing’ and ‘Fuel & light’ has decreased since last month,” said the statistics ministry.

"Food continues to drive the gauge in India, food inflation was 8.7 per cent in April, while non-food was a subdued 2.4 per cent. Our base case is a normal monsoon trimming the headline to 4.5 per cent. The RBI has kept its inflation forecast this fiscal unchanged at 4.5 per cent. CRISIL's estimate is a tad lower at 6.8 per cent," said Dharmakirti Joshi, Chief Economist at CRISIL.

Also Read: OMCs to hold petrol, diesel prices in Q1FY25; dismal earnings eyed over revised margins: Kotak's Sumit Pokharna

Monsoon to remain key determinant of relief

RBI Governor Das also mentioned in today's policy statement that the forecast of above-normal monsoon bodes well for the kharif season. The agri-sector's wheat procurement has surpassed last year’s level, and the buffer stocks of wheat and rice are well above the norms, the RBI governor pointed out.

“These developments could bring respite to food inflation pressures, particularly in cereals and pulses,” said Governor Das. However, he added that at the current juncture, “the uncertainties related to the food price outlook warrant close monitoring, especially their spillover risks to headline inflation”.

Assuming a normal monsoon, the central bank has projected CPI inflation for 2024-25 at 4.5 per cent with Q1 at 4.9 per cent; Q2 at 3.8 per cent; Q3 at 4.6 per cent; and Q4 at 4.5 per cent. The risks are evenly balanced, it added.

Economists highlighted that weather is an important factor in determining the food inflation trajectory. ‘’Monsoon was not very favourable last year, and this year there are heatwaves in parts of the country,'' said Aditi Nayar, Chief Economist at ICRA.

"With the onset of summer, prices of perishable items are charting upwards. For the next two months, we expect the food inflation to climb further and then as the base effect turns very supportive, we will end up with temporarily plunging readings in July-August this year," said Nayar.

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Food inflation was very high in July and August 2023, at 15.09 per cent and 11.43 per cent, respectively. "So, we will have very low food inflation in the months of July and August, and things will normalise after that. And by then, more than half of the monsoon season will be over, and those cues will become important for food inflation trajectory after August," Nayar added.

Higher food prices drove the wholesale price index (WIP)-based inflation to a 13-month high of 1.26 per cent in April. On the outlook, analysts said that if food inflation eases and incremental weather shocks are absent, the RBI is likely to get much-needed comfort from the inflation side.

“While core inflation has eased, food inflation remains high, affecting household expenditure. An expected above-normal monsoon should help control food prices and bring food inflation under control. This would prompt the RBI to perhaps lower interest rates towards the end of CY2024,” said Shishir Baijal, Chairman and Managing Director of Knight Frank India.

The six-member Monetary Policy Committee (MPC), led by the RBI governor, on June 7, decided to keep the benchmark repo rate unchanged at 6.5 per cent for the eighth consecutive time by a 4:2 majority. The rate-setting panel also decided to continue with its stance of ‘withdrawal of accommodation’. The RBI raised its GDP growth forecast for FY25 to 7.2 per cent from 7 per cent earlier.