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Is inflation cooling down in India?

Meals inflation has all the time been a wild card. In October, meals and drinks part of Client Value Index (CPI) elevated by 7 per cent yoy. It had averaged 7.6 per cent throughout April-October vs. headline CPI of seven.1 per cent.

From early this 12 months, varied meals parts have been unstable. Beginning with considerations of a spike in edible oil and wheat costs (and generally from increased fertiliser costs) after the onset of the Russia-Ukraine battle, this was adopted by heatwave like circumstances in March-April impacting wheat output, decrease Kharif crop season (June-September) sowing in rice and pulses, and now the crop harm from very heavy October rainfall in some states.

A number of authorities measures taken embrace increased fertiliser subsidy, lower of import duties on edible oils, ban on wheat and damaged rice exports, export obligation on non-basmati rice and compensation to farmers for crop harm from latest rains (introduced by some states).

A repeat of 2019?

In 2019, meals inflation had risen strongly to 12.2 per cent yoy in December. Its whole sequential momentum throughout July-October then was 4.8 per cent vs. 2.6 per cent this 12 months.

It was a case of very excessive vegetable inflation then, pushed by a spike in onion costs which had elevated 171 per cent throughout July to December. Inflation in different parts like rice and pulses was not a significant driver.

This 12 months, cereals have comparatively been an even bigger driver as a result of influence of geopolitical occasions on world costs, diminished home output, and many others. however general meals inflation did not decide up the best way it did in 2019. That is additionally doubtless as a result of authorities intervention this 12 months has been a lot stronger, given the character of meals inflation drivers has controllable features in contrast to inflation in perishables (in 2019) which is tougher to deal with within the near-term.

Respite forward?

Wheat: After procurement of 43 million tonnes in FY22 Rabi Advertising Season, 19 million tonnes procured in FY23 was 57 per cent decrease year-on-year and vs. the FY23 authorities goal.

Wheat value has risen by 11.6 per cent throughout April-October this 12 months vs. 3.2 per cent in 2019. Inventory with the Meals Company of India (FCI) has ranged from 0.9-1.1 instances the mandated degree throughout July-November this 12 months vs. 1.5-1.9 in 2019 (Determine 2).

Though this probably restrains the amount of wheat FCI can promote within the open market to regulate costs, if it rises past consolation, FCI estimates wheat inventory as on April 1, 2023 (after assembly all necessities beneath varied authorities welfare schemes) to be 50 per cent increased than the mandated degree.

Rabi season wheat sowing too, as per information on November 11, is up 10 per cent y/y. This could possibly be additional aided by the present wholesome soil moisture and reservoir water ranges (latter 9 per cent above final 12 months and 19 per cent above regular with all areas reporting a better y/y degree as on November 10). Thus, FCI expects procurement which begins in April to be regular.

Rice: Kharif season sowing of rice was 4.8 per cent under 2021 however 1.5 per cent above the traditional space. Newest official kharif manufacturing estimate is for a 6 per cent y/y drop. Thus, rice value has risen by 8.3 per cent throughout April-October this 12 months (lesser than wheat) vs. 2.4 per cent in 2019, additionally as a result of rice export continues to be permitted (solely damaged rice export has been banned in contrast to the whole ban on wheat export).

Nevertheless, rice and paddy shares are nonetheless very comfy and has ranged from 2.6-3.5 instances the mandated ranges throughout July-November this 12 months vs. 2.2-3.5 in 2019.

Procurement of kharif output has began and there could possibly be some hit from extra rainfall within the main producer states like Uttar Pradesh in early October however the extent of injury brought on, particularly to paddy throughout states, will not be totally clear. Nevertheless, FCI estimates rice inventory alone, as on April 1, 2023, to be 74 per cent increased than the mandated degree. Additional, real-time information suggests common value until date in November has fallen barely under the October degree, the primary m/m drop in seven months.

Pulses: Kharif sowing of pulses was 4 per cent down y/y however the authorities estimate of manufacturing is flat from 2021, though the hit from final month’s extra rain is to be ascertained. Though rabi sowing of pulses is down y/y, that too solely marginally by 1.4 per cent as on November 11, sowing for the principle sub-categories of gram and lentil is in reality up. Once more, present wholesome soil moisture and reservoir degree ought to assist right here. Costs have risen solely by 3.6 per cent throughout April-October this 12 months (vs. 8.5 per cent in 2019) and value progress within the newest CPI print for October has moderated.

Oils and fat: The import obligation lower by the federal government has benefited this class and costs of edible oils have sequentially fallen from June to October. The import obligation lower has now been prolonged until March 2023.

Greens: Tomato value has been very unstable however information suggests it has been falling in November after rising sharply within the earlier two months. Progress in potato value, already reasonable, has been easing a bit in November and the brand new crop harvest may hit the market by subsequent month. Onion value has picked up (13.3 per cent in November on the time of writing) however that is nowhere near that in 2019.

Vegetable costs are sometimes unstable but when moderation in sequential progress from the beginning of this month is adopted by the seasonal winter deflation, or even when it occurs after a consolidation section in costs, it may assist drive meals inflation decrease.

Different meals gadgets: Value progress in protein meals sources corresponding to meat and fish, eggs and milk have remained reasonable. In latest months, value momentum has been under that instructed by historic seasonal developments. Costs of fruits have additionally fallen within the final three months and in 5 out of the final six months.

Progress in farm enter value has begun to reasonable consistent with oil value progress. This, as calculated by RBI, is a weighted common of yoy progress in 5 related WPI parts. Amongst these, excessive pace diesel and electrical energy are two main inputs and each have moderated. This augurs properly, ceteris paribus, for softer incremental meals value progress.

Meals costs have been unstable this 12 months as a result of geopolitical developments and home manufacturing points. Nevertheless, that is completely completely different from 2019 when spike in onion costs had dominated meals inflation for a number of months.

Authorities intervention can also be a lot stronger this time. Costs of cereals, significantly of wheat, have been of concern in 2022 however there may be potential for some incremental moderation in progress. Rice shares stay fairly comfy too.

Costs of sure pulses, greens, and many others. have additionally eased a bit from early November, though it stays above October ranges. Farm enter value progress has been falling since July. Extra rainfall in October can have its influence however the above early indicators are encouraging and must be watched carefully.

(Sreejith Balasubramanian is an economist (fund administration) at IDFC AMC)


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