The last time the Reserve Bank of India's (RBI) monetary policy committee (MPC) met in early June, consumer price index (CPI)-based inflation had dropped to well below its upper-end of the 2-6 per cent band. From over 6 per cent in January and February, it had fallen to an 18-month-low of 4.7 per cent in April, prompting RBI to maintain its benchmark repo rate on hold at 6.50 per cent.
Now, retail inflation has started inching back again. The June CPI print came in at 4.81 per cent, compared with an upwardly revised 4.31 per cent in May and above economists' expectation of 4.6 per cent. Sharp rise in vegetable prices are playing spoilsport now and will put pressure on the near-term inflation outlook.
Tomato prices, for instance, have been hovering well over Rs 100 per kilo in recent weeks, forcing households and restaurants to either stop using the kitchen staple for the time being or look for alternative substitutes like other vegetables in salads or canned tomatoes in curries. Prices of other food products have also been high.
Further, heavy rains and floods in several regions in north India have also pushed up prices of other vegetables and fruits anywhere between 20 per cent to 100 per cent, according to reports.
This will put pressure on near-term inflation forecasts, say economists, many of whom now see the Reserve Bank keeping rates on hold for a longer time and any possibilities of a rate cut will be further delayed. Thankfully, core inflation (prices excluding food and energy), which had been sticky, has been moderating and has trended below 6 per cent for four consecutive months now and this should provide some respite.
"With the sharp and anomalous rise in vegetable prices continuing into July, we see July inflation tracking closer to 6 per cent levels, if the current trends persist and August may remain similarly elevated," said Sonal Varma, chief economist, India and Asia ex-Japan at Nomura Securities.
Weather-led disruptions are expected to cause near-term supply issues, posing upside risks to food inflation, feels Upasna Bhardwaj, chief economist at Kotak Mahindra Bank.
"With waning favourable base effects, inflation has bottomed out in April-June FY24 (averaging 4.6 per cent) and will likely average 5.3 per cent in second quarter to fourth quarter of FY24," she said.
Bhardwaj, however, feels the sharp increase in vegetable prices is likely to remain temporary amid supply-side central government intervention.
Madhavi Arora, lead economist at Emkay Global Financial Services, feels the sharp sequential uptick in food-led inflation could continue till August-September implying pressure on the headline inflation will stay.
Emkay has raised its retail inflation forecast for the current financial year ending March 2024 to 5.2 per cent from 4.8 per cent. Bhardwaj of Kotak too has raised the full year inflation forecast to 5.1 per cent from 4.9 per cent. RBI has forecast CPI inflation at 5.1 per cent for the year.
"We believe if tomato prices increase without any substantial change in potato and onion then average inflation in Q2 (July-September) FY24 will come near 5.8 per cent, but if the TOP (tomato, onion and potato) inflation increases, then CPI might come around 6.0 per cent in Q2. Accordingly, average CPI for FY24 will vary between 5.2 per cent to 5.4 per cent," pointed Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.
He says that while inflation will remain within RBI's tolerance band this year, a continued vigil on the evolving inflation outlook is is warranted given the progress of monsoon and its impact on Kharif sowing and subsequently on cereals inflation.
While Nomura still expects inflation to average around 4.8 per cent in the current 2023-24 financial year, Varma noted that volatility in vegetable prices in the near-term poses an "upside risk."
"We believe monsoon disturbances - amid already high inflation rates for certain commodities - are lending an upside to the inflation outlook," Dharmakirti Joshi, chief economist at CRISIL also said.
Joshi for now has retained the inflation forecast for the year at 5 per cent and will wait and watch how the monsoon rains pan out in July and August.
"Besides, as in the past, fiscal policy interventions via price stabilisation measures such as release of stocks, facilitating imports, restrictions on hoarding could be deployed to contain abnormal price spikes," he said.
Bhardwaj of Kotak says if monsoon disappoints, it may adversely impact prices of cereal and pulses and that could put further upside on inflation forecasts.
"We maintain our call of a prolonged pause by the RBI as they evaluate the growth-inflation mix and global monetary policy cycle" she added.
Nomura's Varma also expects the Reserve Bank's policy pause to continue, and feels near-term price pressures could mean any rate cuts could be further postponed.
"Higher-for-longer headline inflation, in tandem with the RBI's recent communication of stricter targeting of 4 per cent inflation, along with continued hawkishness by the Federal Reserve, effectively restricts the RBI's manoeuvrability to respond nimbly to growth headwinds. Hence, adverse movements in near-term inflation risks delaying the first cut," said Varma.
Emkay's Arora also expects the RBI to maintain rates on hold for an extended period.
"Global externalities have already pressed the MPC to signal a wait-and-watch guidance, and the transient food spike will only complicate its reaction function," added Arora.
