Going ahead, food price uncertainties would continue to weigh on the inflation outlook. An expected record rabi wheat production in 2023-24, however, will help contain cereal prices, the RBI said while announcing the Monetary Policy’s decision on maintaining the CPI inflation rate.

Early indications of a normal monsoon also augur well for the kharif season. On the other hand, the increasing incidence of climate shocks remains a key upside risk to food prices. 

Low reservoir levels, especially in the southern States and outlook of above normal temperatures during April-June, also pose concern. Tight demand supply conditions in certain pulses and the prices of key vegetables need close monitoring. 

Fuel price deflation is likely to deepen in the near term following the recent cut in LPG prices. After witnessing sustained moderation, cost push pressures faced by firms are showing upward bias. The recent firming up of international crude oil prices warrants close monitoring. 

Geo-political tensions and volatility in financial markets also pose risks to the inflation outlook, RBI added. 

Food inflation stood at around 10% in August.
| Photo Credit: SUSHIL KUMAR VERMA

India’s retail inflation is likely to have retreated below 6% in September after two months over the central bank’s tolerance threshold, thanks to cooling prices for most essential commodities and food items, barring pulses that are seeing a sustained uptick in market prices.

Bank of Baroda economists, who put out a monthly index on essential commodities’ prices, expect consumer price rise last month to have dropped to 5.7% from 6.8% in August and a 15-month high of 7.4% in July. Food inflation stood at around 10% in August.

The National Statistical Office will release the Consumer Price Index (CPI) numbers for September this Thursday. Last Friday, the Monetary Policy Committee of the Reserve Bank of India (RBI) revised its average inflation projections for the July to September quarter from 6.2% to 6.4%. The upgraded estimate implies that the RBI expects September’s retail inflation print to be between 4.9% and 5%.

“Broadly, price pressures assuaged in September, with the reversal of tomato, potato and onion prices being the primary driver. More importantly, the moderation in food prices is broad-based,” said Dipanwita Mazumdar, economist at Bank of Baroda (BoB), noting that the base effects from last September when inflation stood at 7.4% will also alleviate the headline inflation number to an extent.

Pulses play spoilsport

“The only spoilsport continue to be pulses,” she added, with prices of all varieties of dals clocking sharp sequential upticks in September. The bank reckoned that inflation in tur dal year-on-year, hardened to 31.5% last month from 27.3% in August, while moong dal prices rose 10.7% (from 9.2% in August) — their highest rates in 2023.

Rice prices remained sticky, rising 11.1% in September compared to 11% in August, while onion inflation is expected to have sped to 29.5% from 17.6% in the previous month.

The rise in the BoB Essential Commodity Index moderated to 2.9% in September from 6.3% in August, with 35% of the commodities seeing softening price momentum. On a month-on-month basis, the index was down 1.8% from a 0.7% uptick in August, with retail prices of 12 of 20 essential commodities dropping

In a report on food plate costs last week, Crisil Market Intelligence and Analytics estimated a 17% dip in the cost of vegetarian food in September from August levels, while non-vegetarian plates became 9% cheaper. The firm had cited lower tomato and LPG cylinder prices as the main factors for the price correction.

The Monetary Policy Committee (MPC) of the Reserve Bank of India on August 10 decided unanimously to keep the policy repo rate unchanged at 6.50%. 
| Photo Credit: The Hindu

The Monetary Policy Committee (MPC) of the Reserve Bank of India on August 10 decided unanimously to keep the policy repo rate unchanged at 6.50%. 

Announcing the bi-monthly monetary policy on Friday, RBI Governor Shaktikanta Das said the Monetary Policy Committee (MPC) unanimously decided to keep the repo rate unchanged at 6.5 per cent.

The Governor said the real GDP growth for 2023-24 is projected at 6.5%. The latest CPI inflation projection for 2023-24 is at 5.4%, the same as projected previously. Indian forex reserves stood at $586.9 billion as on September 29.

Mr. Das said inflation is likely to ease in September, and the MPC would remain watchful of inflation and remain resolute in aligning inflation to the targeted level. Near-term inflation to soften on lowering of vegetable price and reduction in cooking gas cylinder rate, he added.

Domestic economy exhibits resilience on the back of strong demand, the Governor added.

Private sector capex is gaining ground as suggested by production of capital goods, he said.

The transmission of 250 basis point repo rate cut is still incomplete, the RBI Governor said.

The indications are that food inflation may not see sustained easing in Q3, the Governor added.

RBI may have to consider open market operation with regard to G-secs to manage liquidity, Mr. Das said.

RBI also has decided to double the gold loan under the bullet payment scheme to ₹4 lakh for Urban Cooperative Banks. The Payment Infrastructure Development Fund scheme has been extended by two years to December 2025. Internal Ombudsman Scheme to be further fine-tuned to safeguard the interest of customers, the Governor said.

The government has mandated the RBI to keep CPI inflation at 4 per cent with a margin of 2 per cent on either side.

“In case of any shortfall in production of any crop, prices can increase at a faster rate and add to inflation.”
| Photo Credit: MOHD ARIF

The inflationary impact of the 5%–11% increase in the minimum support price (MSP) for farm produce will be an additional factor for the RBI’s Monetary Policy Committee (MPC) to consider in its ongoing bi-monthly policy review to be announced on Thursday.

The spillover effects on consumer food prices from higher assured remuneration to farmers will hinge on the government’s procurement strategy for foodgrains and prevailing market prices, but any production shortages could lead to higher prices, economists cautioned. 

For instance, the 7% increase in paddy MSP could lead to higher prices if the crop is not higher than last year’s output, said Bank of Baroda chief economist Madan Sabnavis, who termed the increases in MSP ‘quite aggressive’ relative to past increases, which had been in the 4% to 6% range.

“Procurement takes place for rice, whose inflation is already high at 11%,” noted Mr. Sabnavis. “So an increase of 7% will add to benchmark prices in the market. Similarly, jowar, bajra and maize are all running inflation of 13%-15% and hence, also run a risk of higher prices in case of crop failure in any part of the country,” he added.  

“In case of any shortfall in production of any crop, prices can increase at a faster rate and add to inflation. The crux will hence be the size of the crops this season,” he said, stressing that food prices are the major risk to inflation so the Reserve Bank of India will be cautious until there is more clarity on kharif crop prospects. 

State Bank of India economists said that the impact of higher MSPs on inflation “will be negligible” depending on the prices prevailing in the e-National Agriculture Market (e-NAM) as well as procurement levels. 

While procurement of cereals was primarily in terms of wheat and rice, the procurement of pulses was not much, noted SBI Group chief economic advisor Soumya Kanti Ghosh. Moreover, he pointed out that the average modal prices in e-NAM mandis were already higher than the MSP for some of the crops.