Informist, Friday, Oct 13, 2023
By Shubham Rana
NEW DELHI – The sharpest sequential fall in the Consumer Price Index in nearly 10 years may have brought near-term relief to consumers and policymakers, but the risk from food inflation is far from over.
India's headline inflation rate fell more than expected to 5.02% in September from 6.83% a month ago, mainly because of statistical effect of a favourable base and a sharp correction in prices of tomato.
The overall index fell 1.1% month-on-month in September, the sharpest sequential fall since December 2013. The food price index was down 2.2% on month in September, the biggest sequential decline in 33 months. The month-on-month fall in the inflation rate is also the steepest since December 2020.
Apart from tomato prices, which fell 64.9% month-on-month in September, the moderation in the headline print was supported by the reduction in household gas prices by 200-rupees per cylinder. This was reflected in the fuel and light index, which fell 3.9%, the sharpest sequential decline in at least 12 years.
Another point of comfort in September was core inflation that moderated to 4.5% from 4.8% in August due to a broad-based deceleration across segments.
Moving ahead, economists expect core inflation, which strips out volatile food and fuel, to ease further to near 4%, helped by the favourable base effect. "Core inflation should continue to see the downtrend in coming months as global slowdown puts downward pressure on commodity prices," ICICI Bank said in a research report.
IDFC FIRST Bank Economist Gaura Sen Gupta expects core inflation to average 4.2% in the second half of 2023-24 (Apr-Mar) compared with 5.0% in the first half. "A large part of the comfort on core inflation is due to reduction in input cost pressures with WPI non-food manufacturing inflation turning negative, which will keep core goods inflation in check," Sen Gupta said in a report.
The near-term inflation outlook is benign, with the base effect projected to bring down inflation closer to 4% in October.
That said, the outlook beyond October, when the base effect turns unfavourable, is murky.
"Weak monsoons continue to pose a risk to food production and prices, with lower acreage for pulses, cotton and oilseeds among kharif crops and lesser rain impacting water reservoir levels, and potentially lowering the yield of the coming wheat crop," Nomura said in a report.
The effect of weak monsoon is already visible in prices as barring vegetables and edible oils, prices of most food items rose sequentially.
The index of pulses and products rose 4.1% month-on-month, the sharpest sequential increase since April 2020, while cereals increased 1.2%. Inflation in pulses is at a near three-year high of 16.38%, while cereals inflation has been in double digits for more than a year.
Kharif acreage in pulses is down 4.6% on year, while it is 1.6% lower in oilseeds and 3.3% in cotton. There is a threat to rabi crop as well, with water level in major reservoirs below the 10-year average. As of Thursday, water level in 150 key reservoirs in the country was down 18% on year and 6% lower than the 10-year average.
"Progress of wheat sowing in the upcoming rabi season needs to be carefully monitored as cereal shocks exhibit far more persistence than other food items, staying in the system for 6-months or more, and even spilling over into core prices," economists at HSBC Bank said in a report.
Considering food makes up for nearly half the CPI basket, if food inflation remains sticky, headline inflation will take longer than expected to fall to 4%, the Reserve Bank of India's mandated inflation target.
Higher food prices will also feed into households' inflation expectations, which moderated by 50 basis points to 8.4% in September.
Another concern that may feed into inflation expectations is crude oil prices. Brent crude oil prices have stayed near the $90 per barrel mark for over a month now, though they are unlikely to reflect in CPI inflation soon as the government is not expected to increase retail prices of petrol and diesel ahead of the upcoming state polls and General Elections next year.
Overall, achieving 4% inflation on a sustainable basis is still some time away, as is clear from the central bank's projections. And sticky food inflation will only make this journey longer and arduous.
While the Monetary Policy Committee is not expected to raise the repo rate any more, after 250 bps of hikes between May 2022 and February, higher inflation in Jul-Aug has pushed back hopes of a rate cut further to the middle of 2024.
The sharp fall in inflation in September may have come as a welcome relief for the policymakers, but with non-vegetable food prices still rising, the war against price rise is far from over. End
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