The Cabinet's decision to hike the Minimum Support Price (MSP) on wheat, lentils, gram, mustard and safflower for the rabi season is likely to push inflation up by 0.2 percentage points over the year, a Bank of Baroda study found on October 16.
On October 16, the Cabinet announced a Rs 150 per quintal increase in wheat to Rs 2,425 compared with Rs 2,275 in the previous Rabi season. Prices of lentil were hiked by Rs 275 to Rs 6,700 per quintal, whereas rapeseed and mustard prices were increased by Rs 300 to Rs 5,950 per quintal.
“If the entire increase in MSP is passed on to final prices for all output in the extreme case, the impact on the CPI would be around 0.27%. While this normally would hold for wheat where there is procurement, it may not for the other crops,” Madan Sabnavis, chief economist, Bank of Baroda noted.
The combined weight of commodities in the consumer basket is 4.5 percent, of which half is accounted by wheat and atta.
The MSP increase for wheat is 6.6 percent compared with the previous year, while the MSP for gram and lentils has been hiked by around 4 percent, and mustard prices are up 5 percent.
India’s food inflation has been a cause of concern for the Reserve Bank. In October, food prices again jumped above 9 percent from around 5 percent in the previous month.
Wheat inflation was a high 6.7 percent, while chana inflation was 21.6 percent during this period.
Vegetable inflation was the major culprit with prices of onions and potatoes rising over 60 percent and tomato inflation at 50 percent.
The first rate cut hinges on food inflation subsiding in the coming months.
The Reserve Bank of India held the policy rate at 6.5 percent for the tenth consecutive time in October and experts indicate will likely hold it again in December meeting.
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