India’s policymakers are unlikely to tweak interest rates immediately to ease the plight of citizens whose food bills have soared due to a spike in vegetable and pulses’ prices.
The rate-setting members may just be forced to revise their inflation forecasts, economists told ET Online.
The recent spike in the prices of essential food items, which have doubled in most cases across India, has been attributed to geographical anomalies like heatwave and pestilence. Most prominently, prices of essentials such as tomatoes, ginger, bottle gourd, and green chillies have seen a painful rise.
Economists opined that the rise in prices is transitory in nature and is unlikely to alter the Monetary Policy Committee’s rate plans imminently. However, the RBI is likely to turn more cautious.
“The summer months usually see volatility in vegetables prices and this is unlikely to alter the RBI’s policy plans for now. That said, an increase in volatility in food prices which pushes up the inflation path for H2FY24 could push rate cut expectations forward,” said Rajani Sinha, Chief Economist at CareEdge.The MPC, which took a breather > after hiking rates by 250 bps since >, is now waiting for the higher lending rates to take effect. However, with food forming a significant 40% portion of the overall inflation basket, RBI is bound to be on alert, especially with El Nino in sight.Broad-based rise
According to recent reports, the price of tomatoes has skyrocketed from Rs 15 per kg in the first week of May to an astonishing Rs 150 per kg in various regions across the country. Wholesalers say that the price of vegetables has doubled in one week and their sales have been reduced by 40%.
Data shows that there has been a ubiquitous increase in food prices, with spices too taking a hit. The prices of cumin seeds have shot up to Rs 750 per kg from Rs 400 per kg in April. Melon seeds, currently priced at Rs 750 kg, were sold at Rs 300 per kg around three months back.
This spike also comes at a time when essential food items such as milk had earlier seen price hikes, while retail fuel prices have stayed at elevated levels as the government refused to slash taxes even amid a drop in global commodity prices..
“To be sure, there is some worry about rice and pulses, where inflation is rising. Here, monsoon can help change the trajectory,” said Dharmakirti Joshi, Chief Economist, CRISIL.
“Typically, the RBI ignores increases in food prices due to transitory supply shocks. But sustained inflation in food does worry them as food is a significant part of consumer inflation basket and can sway the print above their inflation target,” added Joshi.
The government has mandated the RBI to ensure retail inflation remains at 4 per cent, with a 2 per cent margin on either side. The consumer price index-based retail inflation rate slowed to 4.25 per cent in May.
No pivot, only pause
After holding the benchmark lending rates at 6.25 per cent in its April meeting, RBI Governor Shaktikanta Das repeatedly stressed that it was simply a pause, not a pivot. Then in June, the MPC voted to pause yet again.
“This second straight pause suggests to us that the RBI has reached this cycle’s peak repo rate,” said Rahul Bajoria, economist at Barclays on June 9.
Certain corners of India Inc wondered if RBI would cut the policy repo rate soon. However, expectations may now need tempering. The central bank was expected to start cutting the policy repo rate in early 2024, S&P Global Ratings said in a report.
“The RBI could look through these temporary factors and keep rates unchanged at 6.5%. That said, an increase in volatility in food prices which pushes up the inflation path for H2 FY24 could push rate cut expectations forward,” said Sakshi Gupta, Principal Economist, HDFC Bank.
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