India’s core CPI hits record low BUT food prices to burn a hole in your pocket; Will monsoons bring any respite?
- Food inflation continues to pose considerable upside risk in June, according to economists. The trajectory of headline CPI hinges on the spatial distribution of South-West monsoon, they said.
India's retail inflation based on the consumer price index (CPI) dropped to 4.75 per cent in May from 4.83 per cent in April, touching the lowest in a year, according to recent government data. The core CPI continued its downward trajectory, with the May'24 print at 3.12 per cent on a year-on-year (YoY) basis– the lowest on record so far. The core inflation, which excludes the more volatile food, and fuel and light groups, makes up nearly 50 per cent of the basket.
Food inflation, which accounts for nearly 40 per cent of the overall consumer price basket, rose 8.7 per cent YoY in May. Food inflation has remained stickey above the eight per cent-mark since November 2023. Prices have remained elevated for over a year now, primarily due to last year's below-normal monsoon rains.
Food prices to stay elevated over climate shocks
The soaring prices, especially those of vegetables and fruits, are likely to burn a hole in the common man's pocket over climate-related shocks causing a supply deficit in 2024 as well. Sequential food items with 32 per cent weight in overall CPI basket are witnessing considerable momentum, according to economists.
‘’Another tomato and onion price shock may be imminent. Already in June 2024, prices of these items of vegetables are on the rise, attributable to adverse weather conditions and demand supply mismatches. We do not foresee food inflation dipping below 7.5-8 per cent in the near term,'' said economists at Bank of Baroda.
While announcing the bi-monthly monetary policy, Reserve Bank of India (RBI) Governor Shaktikanta Das warned earlier this month 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.
The RBI Governor added that at the current juncture, “the uncertainties related to the food price outlook warrant close monitoring, especially their spillover risks to headline inflation”. Domestic brokerages highlighted that the delayed rate cut cycle in the US and RBI’s keen vigil on food inflation may push the rate cycle in India to Q4FY25.
In May, within the food basket, six out of 12 broad categories have remained above six per cent, with inflation remaining elevated for vegetables (27.3 per cent, YoY), pulses (17.1 per cent), cereals (8.7 per cent) and eggs (7.6 per cent). Considerable upside pressure was also visible in the case of oils and fats and fruits.
Pressure points were far board ranging from cereals, eggs, vegetables, pulses, sugar and spices. Going forward, there is considerable upside risk to overall food inflation. Again, a tomato and onion-induced price shock might lead to overshooting of headline CPI numbers compared to RBI’s trajectory, according to Bank of Baroda.
Monsoons, rural demand may lower food prices
Food inflation continues to pose considerable upside risk in June as well, according to economists. The monthly price rise in onions and tomatoes have been significant. For tomatoes, the December-June harvesting crop is impacted, attributable to heatwave in April and May and early rain in some states.
For onion as well, demand-supply mismatches have impacted prices. Other than vegetables, even pulses such as gram and tur are witnessing price rise. There may be some strain in the existing buffer stock of pulses, as well. Thus, Q1FY25 inflation print might offshoot RBI’s projection of 4.9 per cent, if the food price shock continues to prevail, according to Bank of Baroda.
Reservoir levels are also lower compared to last year (22 per cent compared to 28 per cent of same period of previous year, till June 6). The global food prices are stickier. The rainfall level in monsoon and rural demand are likely to bring some respite to food inflation, said economists.
‘’The Southwest monsoon has seen an early onset in Kerala (June 1) and Northeast India (June 5) by two and six days, respectively, over the normal onset date. Nevertheless, adequate volume and dispersion of rainfall in the season remain key to improve the prospects for kharif crop and replenish the reservoir levels, which would be crucial to support the rabi crop, and rein in food prices,'' said Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA Ltd.
According to Bank of Baroda, the trajectory of headline CPI now hinges on the spatial distribution of Southwest monsoon. On demand front, still the picture is hazy. FMCG companies in their financial performance has highlighted towards resorting to a volume-led approach by undertaking price cuts. Upside risk to core remains capped albeit some correction with expected pick up in rural demand.
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Business NewsEconomyIndia’s core CPI hits record low BUT food prices to burn a hole in your pocket; Will monsoons bring any respite?
First Published:13 Jun 2024, 09:49 PM IST
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