Decoding India’s food inflation | Vegetable prices sizzle to 57-month high; Any respite in near-term? Experts weigh in
- India's food inflation: Vegetable inflation hardened to a 57-month high of 42.2 per cent in October, which weighed on food and beverages basket in the inflation index.
India's food inflation: India's retail inflation hit a worrying 14-month high of 6.2 per cent in October 2024, breaching the Reserve Bank of India (RBI)'s medium-term tolerance band of two to six per cent for the first time in over a year. The country's consumer price index (CPI)--based inflation last month was driven by a sharp uptick in food inflation, with vegetables (onions, tomatoes), edible oils, and beverages contributing the highest to the inflation basket.
India's food inflation- the annual inflation for food items, which accounts for nearly half of the consumption basket, rose to 10.87 per cent in October 2024 compared to 9.24 per cent in September and 6.61 per cent in the year-ago period. The National Statistics Office (NSO) data showed a significant inflation decline in the 'pulses and products', eggs, 'sugar and confectionery' and spices subgroups in October 2024. "High food inflation in October is due to an increase in the inflation of vegetables, fruits, oils, and fats," said the NSO.
Rising food prices have drastically reduced the purchasing power of middle-income households, affecting corporate earnings and hurting economic growth in Asia's third-largest economy. Food inflation has remained the pain point for policymakers as they struggle to reduce rates, which is impacted sideways due to domestic factors, external headwinds, and geopolitical conflicts.
Decoding India's food inflation: Core, vegetables, other items
India's core (CPI excluding food and beverages, fuel and light, and petrol and diesel for vehicles) inflation rose to a 10-month high of four per cent in October 2024 from 3.8 per cent in September 2024, the highest level since November 2023. The overall food inflation in October was the highest in 15 months.
According to Vinit Bolinjkar- Head of Research at Ventura Securities, the broad-based inflation extends into core items, indicating that price pressures are not limited to volatile sectors and could signal a longer-lasting trend.
“This rise in essential costs is already affecting consumer demand, particularly for discretionary goods, as households prioritize basic needs, leading to weaker sales growth reported by many consumption-focused companies,” he said.
Headline CPI, excluding food and beverages, rose by three per cent compared to the April-September FY25 average of 2.4 per cent, suggesting that food remained the driving force behind high prints. The personal care and effects component sustained the upside, rising 1.9 per cent in October from 1.2 per cent rise in September, reflecting a rise in gold prices and festive demand.
“Persistent rise in perishable prices amid inclement weather and supply disruption and concentrated rains and the sharp upswing in prices of oilseeds post-hike in import duty drove food prices higher,” said domestic brokerage firm Elara Securities India Pvt Ltd.
According to Aditi Nayar, Chief Economist and head of Research and Outreach at ICRA Ltd, food and beverage inflation surged to an eye-watering 9.7 per cent in October 2024, the firmest since mid-2023, from 8.4 per cent in the previous month, amid an uptick in seven of the 12 food groups.
Vegetables inflation hardened to a sizzling 57-month high of 42.2 per cent compared to 36 per cent in September 2024, which weighed on the food and beverages and, consequently, the headline inflation print in the month. Sequentially, prices of vegetables saw the sharpest jump.
The inflation rate for cereals was 6.94 per cent compared to 6.84 per cent in September, while that for pulses was 7.43 per cent against 9.89 per cent a month earlier. The inflation rate for oil and fats was 9.51 per cent compared to 2.47 per cent in the previous month, mostly due to an increase in edible oil prices.
According to Suman Chowdhury, Executive Director & Chief Economist, Acuité Ratings, while the fading of the favourable base factor has contributed to the surge, continuing high prices of vegetables have been a key factor in the high figure. Tomato prices have soared due to heavy rains in Sept-Oct, damaging crops in key producing states like Karnataka, Andhra Pradesh.
"Additional pressure persists from edible oils and pulses. The government raised import duties on crude soybean, palm, and sunflower oils from 5.5 per cent to 27.5 per cent and on refined edible oils from 13.7 per cent to 35.7 per cent in September, contributing to the recent price surge," said Chowdhury.
India's food inflation outlook: Any respite in near-term?
Going forward, economists say that all eyes will be on the kharif harvest season and the progress in rabi sowing. According to Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers, while volatile food inflation is a major concern, the good monsoon and better rabi harvest would result in lower food price volatility in the next quarter.
Upasna Bhardwaj, Chief Economist at Kotak Mahindra Bank, expects the uptick in food prices to keep headline inflation higher than five per cent even in the next reading before the seasonal downturn begins to bring down inflation.
Radhika Rao, Senior Economist, DBS Bank, believes that incoming data for November points to some moderation in vegetables, which may help soften the headline to 5.5-5.7 per cent YoY. Aditi Nayar of ICRA agreed on the likely headline inflation print for November. She also says, “With mixed trends for food items amid a favourable base, ICRA expects food and beverages inflation to ease to 8.0-8.5 per cent in November 2024 (+8.0 per cent in November 2023) from 9.7 per cent in October 2024 (+6.3 per cent in October 2023).”
Global factors continue to add complexity. Although Brent crude prices have steadied near $72 per barrel, risks of imported inflation persist, especially amid Middle Eastern tensions and rerouting pressures in the Red Sea. “This could subtly affect inflation with a time lag”. Conversely, the upcoming Kharif harvest, aided by steady reservoir levels and the anticipated La Niña influence, may ease food inflation in the winter months," said Arsh Mogre, Economist - Institutional Equities, PL Capital - Prabhudas Lilladher.
Vinit Bolinjkar of Ventura Securities added that as global commodity prices and domestic challenges like climate impacts continue to influence food inflation, this may further strain rural demand and pose risks to sectors reliant on rural spending. “Overall, India faces a challenging economic landscape where the RBI will need to weigh inflation control measures carefully to support growth without stifling economic recovery,” he said.
Onion prices to cool down to ₹35 per kg: Govt official
Currently, the average all-India retail price of onion is ruling at ₹54 per kg and the prices have declined in the past one month after the government's subsidised sale of onion in key consuming centers. The government is disposing of the buffer stock onion in the retail market at a subsidised rate of ₹35 per kg in Delhi-NCR and other cities to provide relief to consumers from high prices.
The government has a buffer stock of 4.5 lakh tonnes of onion, of which 1.5 lakh tonnes have been disposed of to date. In the last few weeks, about 4,850 tonnes of onion have been supplied through rail rakes to Delhi, Chennai, and Guhawati. A maximum of 3,170 tonnes of onion was transported to the price-sensitive Delhi market.
The government introduced bulk onion transportation through special trains called the “Kanda Express.” Consumer Affairs Secretary Nidhi Khare told news agency ANI, "The Kanda Express has delivered onions twice to Delhi and once each to Guwahati and Chennai, which has had a positive effect on stabilizing prices."
She added that the third Kanda Express arrived in Delhi, and its effect on local onion prices should be evident within the next day. "Our goal is to reduce retail onion prices to around Rs. 35 per kg through these targeted interventions," she said.
India's searing inflation print fades away RBI rate cut bets
India's inflation numbers for the last two months, remaining above the RBI’s target level of four per cent, have further receded the rate cut expectations for next month. Economists widely expect RBI to stay on hold in the upcoming December policy before considering a cautious easing from February.
According to Sujan Hajra of Anand Rathi Shares and Stock Brokers, “Repo rate will remain high. While RBI’s change in stance from the withdrawal of accommodation to neutral raised expectations of rate cuts in December, inflation data of the past two months indicate that it would hold rates."
“This is consistent with our view that rate cuts will begin only at the beginning of 2025. We expect the RBI to be cautious in its approach toward rate cuts and the government to take some supply-side measures,” said the economist.
Radhika Rao of DBK Bank believes a sharp rise in October and an above-five-per cent print in November will keep 3QFY25 (4Q24) inflation at mid-five per cent, above the official forecast of 4.8 per cent YoY. This necessitates an upward revision in the official FY25 inflation projection at the next rate review.
“Firm inflation, hawkish speak from the central bank and heightened global volatility confirm that rate cuts are off the table in December. October’s print, nonetheless, marks a peak in this cycle,” said Rao on RBI rate cut outlook.
Elara Securities India Pvt Ltd postponed its rate cut call to February 2025. The brokerage believes vegetable prices will moderate in the next few days due to the arrival of Kharif crops and favourable Rabi sowing conditions; however, any meaningful moderation is unlikely to occur until mid-November.
This means that when the MPC meets in December, it will have little comfort from the food price data, ruling out the December 2024 rate cut. Per Elara Securities, the sharp depreciation of the Rupee and foreign fund outflows will likely exacerbate RBI’s task of managing external sector pressure amid elevated inflation.
“We revert to our call first rate cut call in February 2025 from December 2024, as it would give the RBI better clarity about the inflation bump in Q3FY25E and the overall trajectory. While our base case remains a 25 bp cut, we do not rule out a 50 bp cut in February 2025 if the CPI surprises on the downside or remains within the RBI’s estimates as risks to growth have started to amplify,” it said.
According to Nikhil Gupta, Chief Economist of Motilal Oswal Financial Services, the combination of weak growth and high inflation in India is not favourable in a period when many global central banks are cutting rates. Gupta sticks with his forecast of the RBI's first rate cut in February, assuming a sharp deceleration in 2QGDP growth and its outlook.
Also Read: RBI raises domestically-held gold by 102 metric tonnes in H1FY25; reserves volume swells to 854 MT
With the CPI inflation expected to exceed RBI's estimate for Q3 FY2025 by at least 60-70 bps, a rate cut in the December 2024 policy review appears ruled out by Aditi Nayar of ICRA as well, despite her projection of a sub-seven per cent GDP growth print for Q2 FY2025. “We anticipate a shallow rate cut cycle of 50 bps may commence in February 2025 or later,” she added.
Nish Bhatt, Founder & CEO of Millwood Kane International, also expects a delay in the RBI's rate cut cycle. “The central bank's moves will be crucial as a rate cut is crucial to boost the softening of urban and rural consumption,” said Bhatt.
However, Suman Chowdhury of Acuité Ratings believes the chances of a rate cut in February have also become a bit uncertain given the global scenario and the new administration in the US will hinge on a steady decline in food inflation over the next few months. “There is an upside risk to the RBI CPI forecast for Q3FY25 that is pegged at 4.8 per cent,” said Chowdhury.
The RBI has kept the repo rate at 6.5 per cent to keep inflation contained. The repo rate is the rate of interest at which the RBI lends to other banks.
Disclaimer: The views and recommendations provided in this analysis are those of individual analysts or broking companies, not Mint. We strongly advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and individual circumstances may vary.
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Business NewsEconomyDecoding India’s food inflation | Vegetable prices sizzle to 57-month high; Any respite in near-term? Experts weigh in
First Published:13 Nov 2024, 08:34 PM IST
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