Explained: Cheaper tomatoes cut retail inflation but upward pressure persists on food inflation
Explained: Cheaper tomatoes cut retail inflation but upward pressure persists on food inflation
According to the forecast made by the IDFC First Bank, the maximum impact of the decline in tomato prices will be felt in the September CPI data, which is expected to come at around 5.2 per cent to 5.5 per cent. The Bank’s estimate assumes a further decline in tomato prices in the remainder of September, writes Krishnanand.
Hyderabad: In a big relief for policymakers and consumers alike, softening tomato prices have brought down India’s retail price index in the month of August this year as the Consumer Price Index (CPI) moderated from 7.4 per cent in July to 6.8 per cent in August but careful scrutiny of latest official data reveals that upward pressure on food inflation persists on the majority of the components in food and beverages segment.
The moderation of the retail prices in August was mainly on account of moderation in the food inflation as food inflation in August was 9.2 per cent in comparison with the food inflation in the same month last year. The food inflation was 10.6 per cent in July this year in comparison with the food inflation in July last year.
Moreover, the core inflation which excludes food, fuel and tobacco items moderated to 4.8 per cent in August in comparison with 5 per cent in July this year.
Persistent food inflation
Though softening of tomato prices and other seasonal vegetables has its expected cooling impact on the retail prices in the country, giving an opportunity to the Reserve Bank of India (RBI) to maintain the status quo in the next month’s monetary policy committee meeting. However, as the retail prices are still hovering above the target band set by the government under Section 45ZA of the RBI Act, high retail prices would weigh on the minds of the members of the Monetary Policy Committee.
Though the tomato prices have softened from a record high witnessed during the monsoon season upward pressure on some other vegetables, cereals, pulses, spices and milk persists. Although the upward pressure on vegetables tends to be short-lived due to the onset of the winter season other food items such as cereals and pulses tend to show persistent upward pressure even if it is less volatile in nature as is the case with vegetables.
The road ahead
According to the forecast made by the IDFC First Bank, the maximum impact of the decline in tomato prices will be felt in the September CPI data, which is expected to come at around 5.2 per cent to 5.5 per cent. The Bank’s estimate assumes a further decline in tomato prices in the remainder of September. Moreover, the cut in LPG prices (an 18 per cent decline on a month-on-month basis), will also aid moderation in September CPI inflation, reducing headline inflation by 20 basis points to 30 basis points. As a result, the Core inflation is expected to come down to 4.8 per cent in September.
Monsoon worries
Though the softening of vegetable prices, particularly the sharp decline in tomato prices, with the onset of the winter season has brought relief to consumers and policy makers an uneven monsoon poses a challenge to inflation in the near future. For example, India witnessed a deficient monsoon in the month of August this year and water reservoir levels also remain at lower levels. Rainfall activity in the first two weeks of September is expected to be 5.8 per cent below normal as against a 36 per cent deficit in August.
As per Skymet, rainfall activity is expected to improve in the remainder of September, which could reduce the cumulative deficit. “Given the uncertainty on the food inflation outlook, we retain the FY24 CPI inflation estimate of 5.8 per cent,” IDFC First Bank said in a statement sent to ETV Bharat.
Impact on monetary policy
Though the retail inflation in September is expected to come down, however, the data for the month will not be available to the Monetary Policy Committee members as they will gather in the first week of October to decide the key inter-bank policy rates, known as repo rate and reverse rate. The repo rate is the interest rate at which banks borrow short-term money from the RBI and the reverse repo rate is the rate at which banks park their surplus fund with the RBI.
Official CPI data will only be out in the second week of October. However, the RBI has indicated that it would look through the food-led spike in inflation as it is expected to be transient in nature. However, the policymakers are also mindful of the fact that persistent food inflation tends to become general inflation as a persistently high food inflation spreads from food inflation to core inflation.
The RBI has also indicated its willingness to act if inflation shows signs of generalization. For now, the core inflation has remained well behaved with moderation in goods inflation and services inflation remaining contained. As per some forecasts, the RBI is expected to remain on pause in the current financial year.
Though the RBI is expected to maintain a status quo on the key policy rates, policy focus remains on keeping liquidity conditions tight to prevent second-round effects. For example, the gradual withdrawal of I-CRR will ensure that core liquidity remains around Rs 2.2 lakh crore to Rs 2.3 lakh crore till October.
According to analysts at the bank, system liquidity is likely to be tight, especially near tax payment dates - the Advance Tax Payment date of September 15 and the GST payment date of September 20. “From November onwards, assuming no inflows from BoP, core liquidity could fall below Rs 2 lakh crore, as currency leakage seasonally picks up. Hence, we don’t expect further liquidity tightening measures from RBI,” they said.
