High food inflation is keeping headline inflation elevated, according to Rajani Sinha, Chief Economist at CareEdge.

The government data released on November 12 showed that consumer or CPI inflation for October had quickened to a 14-month high of 6.2%. This marked an uptick from September’s 5.6%, underscoring a continued upward trend in consumer prices.

Sinha noted, “Core inflation saw a minor rise of 20 basis points to 3.7% in October. Despite a favourable base and controlled core inflation, high food inflation is keeping headline inflation elevated.”

She attributed the surge in food prices to adverse weather conditions impacting crop yields. “Unseasonal rains and a prolonged monsoon in certain regions have led to a price hike in vegetables, especially tomatoes and onions,” she stated. Prices in the edible oils category were also impacted due to higher global rates and the recent increase in basic customs duty on imports.

The import-reliant edible oil sector, coupled with heightened vegetable prices, continues to exert pressure on the CPI basket, which has raised concerns over household inflation expectations. “Managing food inflation is crucial, given its direct impact on household perceptions and spending behaviour,” Sinha added, calling for additional government measures to stabilise food prices.

Looking forward, inflationary pressures may ease as fresh harvests begin to enter the market. The outlook for the upcoming rabi crop appears optimistic, with reservoir levels across most regions surpassing last year’s levels. The delayed monsoon’s impact on soil moisture is expected to further support rabi sowing, particularly in regions outside of the drier northern states, including Punjab and Himachal Pradesh.

Meanwhile, declining global commodity prices, amidst reduced demand, may contribute to the moderation of headline inflation. In October, the global commodity price index dropped by 4.3% year-on-year, with Brent crude prices experiencing a 15% decline in the same period. Sinha cautioned, however, that “geopolitical developments could still influence global commodity markets and supply chains.”

Inflation may exceed RBI’s estimates

In the coming months, inflation may exceed the RBI’s projections for the latter half of FY25, potentially postponing any cuts in policy rates. With the headline inflation rate surpassing the RBI’s target band, the Monetary Policy Committee (MPC) is expected to maintain its current stance in the upcoming December meeting.

Sinha stated, “We expect headline inflation to decline to below 5% by the fourth quarter of FY25, likely prompting the MPC to consider a 25-basis-point policy rate cut in February.” For the entirety of FY25, CareEdge projects CPI inflation to average around 4.8%.

(This article was generated using AI and was reviewed by a journalist.)

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