The jump in food prices is largely because of huge procurement by the government and supply disruption that pushed up prices of cereal, potato, tomato, and protein items.
The major supply disruption in food items, especially perishable products, and a large-scale procurement by the government is likely to keep August CPI above Reserve Bank of India’s benchmark. The jump in food prices is largely because of huge procurement by the government and supply disruption that pushed up prices of cereal, potato, tomato, and protein items, said the SBI Ecowrap report. August inflation numbers may be elevated at around 7 per cent or even higher, the report added. It is estimated that the inflation could moderate to below 4 per cent possibly beyond December as it seems difficult that supply disruptions would normalise against the huge upsurge in the pandemic in rural areas.
The present condition also poses an upside risk to inflation numbers and the hopes are fading away for any rate cut in the current fiscal. Another report by Barclays also suggests that inflation may remain elevated in August, at 6.9 per cent, as sticky prices for food and fuel combine with some return in activity levels are likely to keep cost pressures high.
Though the food prices have swelled up both CPI and WPI numbers, the effect on WPI has been significantly less due to the smaller proportion of the weight of food items in determining the wholesale prices. The SBI research report suggested that there is only 40 basis points difference between CPI and WPI on a comparable scale.
Meanwhile, inflation in India’s import basket has been increasing, largely due to higher gold and fuel prices, though the final impact is expected to be determined by government taxes and relative currency appreciation. Also, despite the strengthening currency, prices of domestic motor fuels have continued to rise over the past few weeks. RBI in its latest monetary policy maintained the status quo on interest rates citing high and uncertain inflation figures. Now, with the CPI numbers rising further, the central bank may undergo the wait and watch approach, keeping the powder dry for a more severe economic condition.