India's retail inflation surges to 7.4% in July on high vegetable prices; food CPI highest since October 2020 | Mint
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Business News/ Economy / India's retail inflation surges to 7.4% in July on high vegetable prices; food CPI highest since October 2020
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India's retail inflation surges to 7.4% in July on high vegetable prices; food CPI highest since October 2020

The consumer food price index (CFPI) in July also surged to 11.51 per cent - the highest level since October 2020, according to data released by the Ministry of Statistics and Programme Implementation on August 14.

Vegetable merchant Shivaji Demre who supplies vegetables to Big Bazaar outlets at Big Bazaar outlet in Vashi Pic: KEDAR BHATPremium
Vegetable merchant Shivaji Demre who supplies vegetables to Big Bazaar outlets at Big Bazaar outlet in Vashi Pic: KEDAR BHAT

India's consumer price index (CPI) inflation surged sharply to a 15-month high peak of 7.44 per cent in July 2023, driven by high food and vegetable prices. July CPI print had breached the Reserve Bank of India's upper tolerance limit of 6 per cent for the first time in five months. The consumer food price index (CFPI) in July also surged to 11.51 per cent - the highest level since October 2020, according to data released by the Ministry of Statistics and Programme Implementation on August 14.

Under the food basket, vegetable prices soared 37.34 per cent against a contraction of 0.93 per cent year-on-year. Vegetables have a 6.04 per cent weightage on the overall retail inflation. The rise in inflation could also partly be attributed to the current surge in tomato prices. In key cities, tomato prices rose to as high as 150-200 per kg.

Inflation for food and beverage soared to 10.57 per cent, compared to 4.63 per cent, while for cereals it rose to 13.04 per cent from 12.71 per cent in June. The inflation rate for fuel and light came in at 3.67 per cent in July. Rural inflation came in at 7.63 per cent, compared to 4.72 per cent in June, while urban inflation stood at 7.2 per cent, rising from 4.96 per cent in June.

Street estimates had predicted that July's CPI print will breach the central bank's 6 per cent limit in July. On a month-on-month level, retail inflation came in at 4.81 per cent in June after easing sharply to 4.25 per cent in May-which was a 25-month low.

Food prices weigh on India's CPI print

Food prices, which account for nearly half of the inflation basket, have soared in the last two months largely due to the erratic monsoon throughout the country, pushing tomato prices at wholesale markets up more than 1,400 per cent in the past three months, according to Reuters.

‘’Erratic monsoons over the past months attributed to a steeper-than-expected surge in the prices of vegetables. As seen by the Food and beverage inflation which rose to 10.57 per cent during the month from 4.6 per cent in the previous month. The vegetable prices are expected to stay elevated for quite some time, though fresh market arrivals may help cool down the prices to some extent,'' said Raghvendra Nath, MD, Ladderup Wealth Management Pvt. Ltd.

Last week, the Reserve Bank of India (RBI) in its Monetary Policy Committee (MPC) meeting upwardly revised the retail inflation projections for 2023-24 at 5.4 per cent, against 5.1 per cent it projected in its June meeting.

RBI Governor Shaktikanta Das, as part of his remarks after the policy meeting, said assuming a normal monsoon, retail inflation is revised to 5.4 per cent, with Q2 at 6.2 per cent, Q3 at 5.7 per cent and Q4 at 5.2 per cent. Retail inflation for Q1 2024-25 is projected at 5.2 per cent.

“The month of July has witnessed accentuation of food inflation, primarily on account of vegetables. The spike in tomato prices and further increase in prices of cereals and pulses have contributed to this. Consequently, a substantial increase in headline inflation would occur in the near term," said Das.

He reiterated what he said after the June meeting – “Bringing headline inflation within the tolerance band is not enough; we need to remain firmly focused on aligning inflation to the target of 4.0 per cent."

DSP Mutual Fund had said in its August edition of Netra report that India's inflation trajectory is expected to be benign, but highly vulnerable to changes in food prices. With almost half of the CPI basket comprising food items, any price changes in this category have a substantial effect on the overall inflation rate in India. So, even small fluctuations in food prices can have a significant impact on the cost of living for the average Indian consumer, according to DSP.

Some food items, especially essentials like vegetables, grains, and dairy, tend to have relatively inelastic demand. ‘’This means that changes in their prices lead to disproportionate changes in overall spending, as people cannot easily reduce consumption even if prices increase. As a result, food inflation can quickly affect household budgets and lead to decreased purchasing power,'' said DSP in its report.

A poll of 53 economists recently conducted by news agency Reuters had predicted that the retail inflation likely accelerated to 6.40 per cent in July on surging food prices. While the RBI's rate-setting panel is tasked with keeping inflation within the tolerance band of 2 per cent to 6 per cent range, it is expected to try and anchor inflation close to the 4 per cent mid-point of that band. However, if the CPI inflation stays elevated for the next two quarters, the central bank will likely not reduce repo rates in the near-term.

Analyst expect RBI to hike rates after July's CPI print

With the spike being significantly higher than expected, analysts are sceptical that inflation will return to its glide path anytime soon. The silver lining could be relatively range-bound core inflation, according to the outlook.

‘’..The RBI considers inflation to be primarily a monetary phenomenon. Under this view, it makes no difference whether the inflation comes from core or non-core component parts, because even high non-core inflation eventually gets transmitted to the core via the wage-price spiral,'' said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Shares and Stock Brokers.

‘’Given this backdrop, another 25-basis point rate hike by the RBI is a distinct possibility. At the same time, a rate cut in the next 12 months appears extremely unlikely. We anticipate that the increase in inflation will have a negative impact on both the bond and equity markets,'' added Hajra.

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ABOUT THE AUTHOR
Nikita Prasad
Nikita covers business news and has been producing news on digital platforms since 2018. She writes on economy, policy, markets, commodities, industry. Her core areas of interests include infrastructure, energy, oil and gas, railways, and transport/mobility. She has worked for business news channels like Moneycontrol, NDTV Profit, and Financial Express in the past. If you have story ideas/pitches/reports or quotes/views to share, reach her at nikita.prasad@htdigital.in.
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Published: 14 Aug 2023, 05:38 PM IST
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