inflation: The other spoilers: Just normal monsoon won’t keep inflation in check

2023-08-02 12:34:51

The last-mile fight against inflation is getting tougher. While concerns over the monsoon seem to dispel, food inflation might yet remain high. The RBI has recently said that the fight is far from over and monetary policy has to stay the course to align inflation with the target in this last leg of a strenuous journey.

India’s retail inflation rate is likely to breach the central bank’s 6% tolerance ceiling again due to sticky pulses and cereal prices even as vegetable price pressures ease, pushing policymakers to raise inflation target in August meeting, Nomura has said in a report.

Factors other than the monsoon have been increasingly shaping food inflation. A case in point is the 6%+ inflation print in three of the past four normal monsoon years, argues a Crisil report.

Monsoon has been normal/above-normal at an all-India level over the past four years. Predictably, foodgrain production has risen in these years. Even then, food inflation, as measured by CPI, remained above 6% in three of these four years.

ET Online

The southwest monsoon started with a delay and stayed in deficit in June. However, it caught up well in July, and currently stands at normal (4% above long-period average, or LPA) as of August 1.

ET Online

The other spoilers

So, a normal monsoon is no guarantee that food inflation won’t spike. Monsoon’s progress and distribution remain critical in the coming two months for food production and inflation. In addition, food inflation may be determined by the following swing factors this year, according to the Crisil report.

1. Impact of El Niño: The World Meteorological Organization declared the onset of El Niño conditions in July. El Niño has usually led to deficient rainfall in India. Since 1991, there have been six occurrences, and rainfall was deficient in five (see table 2) The last El Niño event was in 2015.

However, its impact on growth and inflation is less clear. Of the six El Niño years since 1991, agricultural gross domestic product growth has been negative in four, and retail inflation was above 6% in a mere three. As pointed out in a recent RBI study, factors such as Indian Ocean Dipole, extreme weather events, global commodity prices, and local supply disruptions also influence agriculture and inflation outcomes.

2. Extreme weather events: Extreme weather events such as unusual rains and heatwaves are growing ‘known-unknown’ risks. Last fiscal, despite a normal monsoon, food output was hit by a heatwave in March 2022 and unseasonal rains in October 2022 and in March 2023.

In this fiscal so far, excess rains have already delayed sowing in the beginning of the kharif season. Any more such incidents risk damaging standing crops and yields.

3. Global food supply: Global food supplies face risks from weather and geopolitical developments. El Nino is a risk to crops in other major global producers such as palm oil in Indonesia and Malaysia and rice in Thailand and Vietnam. Among these, palm oil is a major import for India.

Trade restrictions on agriculture remain a risk for international food prices, with countries focusing on ensuring domestic food security. India – the largest exporter of rice and second largest of sugar – has imposed a ban on exports of broken rice and continues curbs on wheat and sugar for ensuring its food security. Russia pulling out of the Black Sea grain deal has also raised inflationary risks since Russia and Ukraine are the world’s largest suppliers of wheat and sunflower oil.

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