Food fury complicates the inflation trajectory

Vegetable prices were the big culprit, rising 12.2% month-on-month, but the rise in other food items, while not so pronounced, was also significant.

While prices were expected to rise, erratic weather has exacerbated the situation. Cereal prices, which had begun to soften, rose in June from the previous month and continued to print double-digit inflation rates. The sequential rise in the prices of protein products such as pulses, eggs, and meat, among others, has been strong for a few months now.

Vegetable prices will recede after new crops arrive in the market over the next couple of months. But they still threaten to keep headline inflation at risk due to the weather impact. The sowing of major kharif crops this southwest monsoon season remains under stress despite recent improvement in rainfall.

All this could also delay the beginning of any possible cuts in interest rates by the Reserve Bank of India, economists said, even though the current drivers of inflation—the seasonal effect and supply-side shortages—are not under the control of the monetary policy committee.

Tomato’s torment

Vegetable inflation played spoilsport, but it had nothing to do with high tomato prices. Rather, tomatoes were a downward force: without them, inflation would have been higher, at 5.2% instead of 4.8%. That’s because tomatoes were still not as expensive as they were last June, and were deep in deflation, with a 35% year-on-year decline despite a monthly jump of nearly 65%.

However, tomatoes could return to the inflation zone in July, the month when their prices really spiralled out of control. So far in July, prices across India average 198% higher than June and 146% higher than July 2022, data from the Department of Consumer Affairs shows. While tomato accounts for just 0.57% weight in the inflation basket, vegetables are known to add a lot of volatility to the headline inflation. Some economists expect inflation to even touch the upper tolerance limit of 6% in July, if vegetable prices continue to surprise on the upside.

Pulses pressure

Prices of pulses and related products have jumped on a month-on-month basis, and their year-on-year rate is now in double digits at 10.5%. Pulses are a protein-rich staple whose prices are closely watched as a vast section of the population depends on them for a necessary nutrient. While periodic ups and downs are common, they have become less pronounced due to proactive policy interventions, Crisil noted in a research report last week. Between November 2015 and July 2017, pulses inflation had risen to as much as 46% before correcting by 25%. “Continued government intervention via price stabilization schemes could ensure that the next peak remains less intense," Crisil said. However, with short supply from last year and erratic rains affecting sowing in major growing states such as Maharashtra and Karnataka, prices are likely to remain elevated, though the removal of procurement ceilings for tur, urad and masur may encourage farmers towards higher sowing of pulses.

Slow sowing

As of 14 July, India has received rainfall 1% above the long-period average. But sowing of pulses was down 16.2%, oilseeds 10.4%, and rice 9.8%. Moreover, excess rainfall in the northwest regions and flooding in several states could impact crops and affect supply chains. The erratic weather patterns and their impact on crops are emerging as a huge risk to inflation.

However, with the RBI’s hands tied on this front, government interventions such as the release of stocks, facilitation of imports, and restrictions on exports and hoarding could help manage abnormal price shocks in the short term. Should prices become entrenched, the central bank may find itself in a difficult position. “Higher-for-longer headline inflation, in tandem with the RBI’s recent communication of stricter targeting of 4% inflation, along with continued hawkishness by the Fed, effectively restricts the RBI’s manoeuvrability to respond nimbly to growth headwinds," Nomura said in a report last week.