In the wake of severe heatwaves persisting in certain areas of northern and eastern India, economists expect food inflation to stay in the range of 7.5-8% in the next two-three months.
According to a report by Bank of Baroda (BoB), “weather vagaries” may lead to consumer price index (CPI) inflation overshooting Reserve Bank of India’s projection in the first two quarters of FY25. The RBI has projected retail inflation to average 4.9% in Q1FY25, and 3.8% in Q2FY25. For the entire fiscal year, inflation is projected to average 4.5%, 90 basis points (bps) lower than FY24.
BoB said that the heatwaves have impacted production of tomato, onion, and potato.
“Due to the heatwaves, production of these perishables has been impacted which is also reflected in lower mandi arrivals,” noted BoB. As a result, prices of these commodities have seen a significant uptick which is expected to keep food inflation elevated in the near-term, it said.
Data sourced from the Department of Consumer Affairs website said, prices of tomato were up 26% on month, so far, in June; and that of onion were up by 14%. Potato prices were up too, by 8% on month.
In the June monetary policy statement, the Monetary Policy Committee had said that “overlapping shocks” engendered by rising incidence of adverse climate events impart considerable uncertainty to the food inflation trajectory.
Market arrivals of key rabi crops, particularly pulses and vegetables, need to be closely monitored in view of the recent sharp upturn in prices. But normal monsoon could lead to softening of food inflation pressures over the course of the year, it had said. Till Thursday, however, the south-west monsoon has been 17.1% below the benchmark.
“While there was an early onset of monsoon over the southern part of the country, the progress and spatial distribution of rains has not been even,” said the BoB report. So far, the southern peninsula has received rainfall which is 16% above the benchmark, the monsoon in other regions has been lower. In fact, rainfall in north-western part of India which has been under a relentless heatwave is 44% below the benchmark.
Abhishek Upadhyay, senior economist, ICICI Securities Primary Dealership (I-SEC PD) said: “Heatwave conditions and monsoon deficiency in north western parts may drive modest upside relative to inflation forecasts in Q1, as prices of vegetables and milk increase.” But, RBI forecasts were already quite conservative in Q2 and we don’t expect those to be overshot, he added.
A report by HSBC said that if the rains do not pick up in the remaining months, there is a risk of the RBI not easing the rates at all. “If rains don’t normalise over July and August, the resultant food stress of 2024 could arguably be worse than in 2023, given low stocks of wheat and pulses in the granaries,” it said. The repo rate currently stands at 6.5%.
