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Continued vigil on the evolving inflation outlook is warranted given the erratic progress of monsoon and its impact on Kharif sowing and pulse inflation, according to the State Bank of India’s economic research department (ERD).
The vigil is required despite the retail inflation remaining within the tolerance range of the Reserve Bank of India (RBI) for the fourth consecutive month (and should remain so for the rest of the fiscal), per ERD’s economic research report “Ecowrap”.
CPI inflation edged higher to 4.81 per cent in June 2023 from 4.31 per cent in May 2023, driven by food and beverages, with the usual suspects vegetables, pulses and meat/fish prices exhibiting the largest increase, while cereals, spices and milk CPI remained at elevated levels, said Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
“On positive cues, Core CPI though declined marginally to 5.12 per cent in June from 5.21 per cent in May, and remains below the one-year average of 5.8 per cent,”he said.
TOP variation
The ERD noted that Tomato, Onion and Potato (TOP) form the staples in the Indian kitchen and their price variation is the chief cause of volatility in the vegetable/ food inflation.
“We believe if tomato prices increase without any substantial change in potato & onion then average inflation in Q2 (July-September) FY24 will come near 5.8 per cent year-on-year/yoy but if the TOP inflation increases, then CPI might come around 6.0 per cent yoy in Q2 FY24. Accordingly, average CPI for FY24 will vary between 5.2- 5.4 per cent,” per Ghosh’s assessment.
Rainfall: spatial distribution uneven
The ERD observed that while at all India level rainfall is 2 per cent above normal till 12 July, the spatial distribution is uneven.
North-west India has rains of 59 per cent above normal; the southern peninsula has a deficit of 23 per cent.
“However, these uneven rains will have minimum impact on food grains production. Further, to see the price cycles of cereals and pulses, we analysed the monthly inflation data of cereals and pulses from Jan 2012 until now (June 2023).
“The results indicate that in an increasing price cycle, cereals continue to rise on an average for 20-months and pulses 19-months. While in a declining price cycle, cereals prices decline continuously for 15-months and pulses by 21-months,”according to ERD’s analysis.
Currently, cereals prices are on a declining trend, while pulse prices are on an increasing trend.
“It is thus crucial to mitigate the increase in pulse prices through Government intervention,” the report said.
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