All bets on timely, widespread rains to cool food inflation

Higher inflation rates also delays the possibility of a rate cut by India's central bank.

India's headline retail inflation has stayed below the five-percent mark for two consecutive months now, but consistently higher food prices have been a cause for concern, with economists betting on the monsoon for a much-needed moderation.

Food inflation has remained above seven percent for the past six months on a year-on-year basis.

In fact, even as overall headline inflation rate came in at an 11-month low in April, the fall was limited by prices of food and beverages that remained elevated at 7.87 percent, edging higher than 7.68 percent a month ago.

Higher inflation rates also delays the possibility of a rate cut by India's central bank.

The Reserve Bank of India (RBI) in April decided to keep its key lending rate unchanged at 6.5 percent for the seventh consecutive time with Governor Shaktikanta Das highlighting the volatility in food inflation as an impediment to the ongoing disinflation process.

A closer look at the latest Consumer Price Index (CPI) data for April reveals that though vegetables and pulses exhibited a declining trend versus a month ago, it continued to hover around double-digits for the sixth and eleventh consecutive month respectively. While, prices of meat and fish as well as fruits increased sequentially.

The heavy lifting triggering a downward trajectory for CPI inflation that hit a high of 7.44 percent in July 2023 has been done by the fuel and light category that has seen contractions in the past few months with the latest print being a negative 4.24 percent in April. This is primarily on account of steps taken by the government, including a cut in LPG prices.

However, a string of measures ranging from a ban on certain varieties of rice to offering subsidised tomatoes to consumers has not yet been able to keep a lid on food prices.

Take for example, the average retail price of potatoes, a key staple for Indian households, which has seen a rise of 46.84 percent to 28.84 rupees on May 13, 2024 versus the same day in the previous year.

As per CRISIL, the cost of home-cooked veg thali rose by 7 percent in March 2024 due to an uptick in prices of pulses, rice, onion, potato and tomato, while that of a non-veg thali declined by 7 percent.

On top of that, the prediction of a heat wave till June has added to the problem especially with expectations that the cost of vegetables may remain elevated for the next few months due to “above-normal” temperatures.

Extreme heat can impact crops in a number of ways either by damaging the produce directly or by triggering droughts because of higher temperatures thereby impacting water-dependent items such as cereals and pulses.

Given that food prices refuse to edge down, all bets are on the Indian Meteorological Department's  forecast of a surplus rainfall panning out.

IMD recently said that the south-west monsoon is likely to advance into the south Andaman Sea, some parts of the southeast Bay of Bengal, and the Nicobar Islands around May 19, which is three days ahead of its normal onset.

As ICRA's Chief Economist, Aditi Nayar, points out, heatwave conditions during the summer season could push up the headline CPI inflation to a five-month high of 5.1-5.2 percent in the ongoing month. But going ahead, the monsoon output is key to softer food prices.

"The impending favourable base effects during the second quarter of  FY2025 are expected to materially soften the headline inflation print to 2.0-4.0 percent in July 2024 and August 2024. Nevertheless, a timely onset and good distribution of the monsoon season would be crucial to support agriculture output in 2024-25 and help control food inflation," Nayar said.

The IMD has predicted an above-average monsoon rainfall in 2024, estimated at 106 percent of the long-term average. Rainfall plays a crucial role in influencing inflation rates, with normal showers favouring controlled inflation.

Dharmakirti Joshi, Chief Economist at CRISIL agrees that while the pressure on food prices remains, monsoons can offer much-needed cooling.

The mild easing of the headline number in April is encouraging, but acceleration of this downtrend is what matters, especially since recent swings have been worrying. Pressure on food prices, which has a 39.1 percent weight in the CPI gauge continues, Joshi said, adding that the "base case is the upcoming monsoon rains can offer respite."

And, the reason why the monsoon in India holds the key to inflationary dynamics is simple.

The bulk of kharif sowing takes place from mid-June to mid-August and rainfall in June-July decides how much area is covered while showers in August-September has an impact on the yields of the crops already sown. Better monsoons also help fill up reservoirs and ponds and recharge groundwater tables, providing moisture for the subsequent rabi winter-spring crops.

And consequently, a good monsoon season leads to better farm output thereby bridging any demand-supply mismatches which then helps keep food prices under control.

But surplus rainfall alone in the upcoming south-west monsoon season isn't enough.

Rainfall needs to be well distributed in terms of time and geography to effectively ease food inflation, Joshi adds.

CareEdge Ratings' Rajani Sinha echoes the same sentiment. While the outlook for food inflation has brightened due to anticipations of a normal monsoon, the temporal and spatial distribution of the rainfall would be a critical factor.

An analysis by India Ratings and Research, of trends in the south-west monsoon rainfall and agricultural output reveals that though the dependency of Kharif output on monsoon rainfall has been on a gradual decline, that of rabi output remains intact.

“An above-normal south-west monsoon rainfall for 2024 no doubt has brightened the prospect of agriculture and rural demand; however, much would depend on the spatial/geographical spread of rainfall during the south-west monsoon season (June-September) which has been uneven over the past few years”, says Sunil Kumar Sinha, Principal Economist, India Ratings.

The upcoming monsoon season is exceedingly important in terms of easing food prices given that the Reserve Bank of India (RBI) cannot do much to influence supply management, Emkay Global's Madhavi Arora points out.

Given that the country's local inflation dynamics still faces risks from global factors ranging from geopolitical conflicts to fears of a growth-slowdown in developed economies, a well-distributed monsoon season could do the trick for the Indian economy.