Simmering veggies may push retail inflation above 6.5% in July

Prices of vegetables, such as tomato, have risen sharply in recent weeks.

The headline retail inflation may shoot past 6.5 percent in July on the back of steep surge in prices of vegetables over the recent weeks. Economists, however, hope that the Reserve Bank of India would not take any action from the monetary policy front that would tighten the financial condition further.

"The surge in vegetable prices (led by tomatoes) could push the July CPI inflation to 6.5-6.7 percent," noted Gaura Sen Gupta, India Economist at IDFC First Bank. "On a CPI weighted basis, vegetable prices have risen by 39.8 percent month-on-month till July 23, as per NHB (National Horticulture Board), significantly higher than the seasonal increase of around 15 percent. Tomato prices have risen by 163 percent MoM as per NHB and by 221 percent as per Consumer Affairs data... Other vegetables such as potatoes and onions have also seen an increase in July, but the rise has been much more moderate."

Also Read: Oh Dear - How the food industry is coping with costly tomatoes

The Consumer Price Index (CPI) inflation had eased to a 25-month low of 4.31 percent in May before it swung back to a more-than-expected 4.81 percent in June. However, after spending four straight months within the RBI's tolerance band of 2-6 percent, inflation is now expected to have breached the upper-bound of 6 percent this month.

The CPI data for July will be released on August 14. Food inflation has an oversized impact on the headline retail inflation rate due to the fact that the 'food and beverages' group of the CPI accounts for nearly 46 percent of the entire consumption basket. As such, any forces that impact the supply of food can make a material difference to the overall inflation trajectory.

The government has tried to arrest the price spiral, with tomato being sold at discounted prices in major consumption centres of India.

Vegetables are not the only food items to have witnessed an alarming spurt in prices. On July 20, the government banned the export of non-basmati white rice as part of last such effort to control domestic food prices. This comes after it had banned the export of broken rice and imposed a 20 percent duty on non-basmati rice in September.

Despite the curbs, rice inflation as per the CPI jumped from 6.94 percent in August 2022 to 11.78 percent in June 2023. According to Nomura economists Aurodeep Nandi and Sonal Varma, daily data indicates rice inflation has risen further in July.

"The late arrival of monsoon and its uneven spread is disrupting paddy sowing which, as of mid-July, is at minus-6 percent year-on-year," Nandi and Varma said in a note on July 21, adding that the ban on non-basmati white rice exports highlighted inflation as a "political priority, with state elections due in Q4 of 2023 (October-December 2023) and general elections in Q2 of 2024 (April-June 2024)".

Also Read: After rice, govt may consider steps to arrest price rise in pulses, wheat, as per source

Inflation's return to 6-percent-plus territory will not be a good news, with the RBI's Monetary Policy Committee (MPC) holding fire in April and June, but warning that it stood ready to take "further monetary actions promptly and appropriately as required to keep inflation expectations firmly anchored and to bring down inflation to the target".

However, it is expected that the MPC will look through the current price spike. "The RBI is likely to look through the pick-up in CPI inflation as it is led by transient supply-side factors," Sen Gupta of IDFC First Bank said, adding that core inflation, or inflation excluding food and fuel, should be watched more keenly.

Sen Gupta expects the core CPI inflation to average 5.1 percent and headline retail inflation to average 5.4 percent in 2023-24 with the latter being 30 basis points higher than the RBI's latest forecast of 5.1 percent.

One basis point is one-hundredth of a percentage point.