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Tough test for RBI as supply crunch fans food inflation

Madan Sabnavis, chief economist at Bank of Baroda, said: “Food inflation will tend to rise faster than the headline inflation. It started in March and will continue for the next two months as well. I expect the headline retail inflation to average 7% in the first quarter, while food inflation will be closer to 8%.”

Moreover, the impact of the heat wave on wheat and some other crops has threatened the record farm harvest estimate of the government. On top of this, elevated energy prices will have an indirect impact on food inflation, through higher transportation costs.
Moreover, the impact of the heat wave on wheat and some other crops has threatened the record farm harvest estimate of the government. On top of this, elevated energy prices will have an indirect impact on food inflation, through higher transportation costs.

As the Reserve Bank of India (RBI) has started tightening key policy rates to curb runaway retail inflation, food articles are going to be the biggest driver of price pressure in the coming months.

Food inflation, driven partly by a spurt in prices of the mostly-imported edible oils, exceeded the headline retail inflation in March, and this trend is only going to accentuate in the coming months, at least during the June quarter, analysts said.
The rise in global commodity prices, including food and fuel, and tangled supply chains in the wake of the Russia-Ukraine conflict, pose strong upside risks to the food inflation trajectory.

The spike in global prices of key fertilisers like urea, di-ammonium phosphate (DAP) and muriate of potash (MoP), and a near four-fold rise in the prices of imported LNG, the feedstock of gas-based urea units, could jack up the cost of food production.

Even though a large part of this extra cost will be borne by the government by way of subsidies, it will still stoke food inflation.
Inflation in food products — the dominant segment in the consumer price index (CPI) with an almost 46% weight — accelerated to 7.68% in March, the highest since November 2020, and compared with 5.85% in February. This was way above the headline retail inflation of 6.95% in March, a 17-month peak. Most analysts expect retail food inflation to be above 8% in April and remain elevated in the short term.

Indonesia’s ban on crude palm oil exports has started further driving Indian cooking oil prices, which were already under pressure due to the conflict in Ukraine, a major refined oil supplier. India meets about 60% of its edible oil requirements through imports.

Moreover, the impact of the heat wave on wheat and some other crops has threatened the record farm harvest estimate of the government. On top of this, elevated energy prices will have an indirect impact on food inflation, through higher transportation costs.

Global urea prices at April-end stood at $ 930 a tonne, sharply up from $380 a tonne a year ago. Similarly, from a level of Rs 18,000/tonne in November, the retail price of MoP has risen to the current level of Rs 32,000/tonne. Also, DAP now costs Rs 27,000/tonne to Indian importers, against Rs 24,000/tonne in November last year.

Indonesia’s decision to ban the export of refined palm oil could push domestic edible oil prices up by 10-15% in the short term, according to trade sources. However, Angshu Mallick, CEO & MD at Adani Wilmar, said prices have peaked and should start to correct from next month onwards. Also, Indonesia should lift the ban on palm oil exports by May 10.

Earlier this week, palm oil futures for July delivery surged 6% to a six-week high of 6,738 ringgit ($1,550) a tonne in Kuala Lumpur. Malaysia and Indonesia account for more than 90% of the total global palm oil trade.

The government had abolished the basic import duty on crude edible oil till September 30, 2022 to ease domestic prices. The current rates of import duties on refined palm oils (12.5%), refined soyabean oil and refined sunflower oil (17.5%) will stay till September 30, 2022.

Bloomberg reported on Thursday that “India is planning to cut taxes on some edible oils to cool the domestic market”. New Delhi was looking to cut the agriculture infrastructure and development cess on crude palm oil imports from 5%, the agency said, quoting unnamed sources.

ICRA chief economist Aditi Nayar expected food inflation in April to have hit 8.1%, beating the likely headline retail inflation of 7.4%. “The ongoing rise in the domestic prices of edible oils, wheat and poultry products, in tune with the global trend, may impart stickiness to the food inflation trajectory, regardless of a normal monsoon. Other pain points may remain, such as the rise in vegetable prices following soaring temperatures and higher diesel prices,” Nayar said.

Madan Sabnavis, chief economist at Bank of Baroda, said: “Food inflation will tend to rise faster than the headline inflation. It started in March and will continue for the next two months as well. I expect the headline retail inflation to average 7% in the first quarter, while food inflation will be closer to 8%.”

DK Pant, chief economist at India Ratings, said: “Food inflation is likely to remain elevated in coming months, as wheat and edible oils will have larger impact on food inflation. High crude oil prices will have second round impact on food inflation through freight. Ultimately, food inflation is likely to remain higher than the headline retail inflation at least in the June quarter.”

Yes Bank chief economist Indranil Pan said: “Global prices of wheat has been on the boil and there have been increases in the domestic price of wheat, despite domestic supplies being strong. The other problem area is edible oils.” With Indonesia banning crude palm oil supplies, it will be difficult for India to find alternative sources of imports soon.

Pan said prices of protein-based food have only been on the increase due to increase in the prices of feed, and this might also sustain for some time. “Higher fuel prices are also expected to increase logistics costs of transporting food grain and will also engineer higher prices for manufactured food items,” he added.

PK Joshi, agricultural economist and former director, south Asia, International Food Policy Research Institute, said that because of the rise in inputs costs like electricity, transportation and pesticides have pushed up prices of various agricultural commodities, thus pushing up food inflation.

Cautioning that the inflation print for April could be higher than in March, RBI governor Shaktikanta Das on Tuesday said: “There is the collateral risk that if inflation remains elevated at these levels for too long, it can de-anchor inflation expectations which, in turn, can become self-fulfilling and detrimental to growth and financial stability.”

Das stressed that inflation is rising alarmingly and spreading fast globally. Geopolitical tensions are ratcheting up inflation to their highest levels in the last 3 to 4 decades in major economies, while moderating external demand. Global crude oil prices are ruling above $100 per barrel. “Global food prices touched a new record in March and have firmed up even further since then. Inflation-sensitive items relevant to India, such as edible oils, are facing shortages due to the conflict in Europe and export bans by key producers. The jump in fertiliser prices and other input costs has a direct impact on food prices in India,” Das said.

Of course, inflationary pressure has been rather broad-based in recent months across goods and services. Core inflation rose to 6.4% in March from 5.8% in February, having exceeded the 5%-mark for 21 months now.

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