India’s food inflation, which accounts for nearly half of the overall consumer price basket, increased to 4.49 per cent in June 2023 against 2.96 per cent in May. Of late, prices of select commodities have shot through the roof due to irregular weather conditions in the country. For instance, retail prices of tomato touched Rs 108.70 per kg at the end of July 2023, up 372 per cent in the ongoing financial year. On August 2, 2023, tomato prices are hovering at around Rs 137.10 per kg.
Prices of onion and potatoes have also increased by 19 per cent and 24 per cent so far in FY24, as per data available with CMIE Economic Outlook. With an objective to tame inflation, the US Federal Reserve in July increased the benchmark rates to a 22-year-high ranging from 5.25 per cent to 5.50 per cent. It has also hinted at more rate hikes to bring down inflation. On the other hand, the Bank of England is expected to increase its interest rates to 15-year highs on August 3. Will these decisions amid the rise in food inflation impact the RBI’s move in the forthcoming bi-monthly monetary policy?
Brokerage Nuvama Institutional Equities expects MPC to maintain the status quo on rates and its stance in the upcoming policy review on August 10.
“MPC would like to wait and assess the cumulative impact on demand of past tightening, after the series of rate hikes. It might stick to ‘withdrawal of accommodation’ ad interim, in view of near-term upside risks to food inflation and the continued hawkishness of Fed/ECB,” Nuvama said in a report.
Nirmal Bang Equities said, “We expect the Monetary Policy Committee (MPC) to keep rates on hold at its August meeting. While CPI inflation in Q1FY24 has come in line with the RBI’s forecast, the recent surge in vegetable prices may lead to an upward revision in the CPI estimate for FY24 from 5.1 per cent. Meanwhile, high-frequency economic indicators are yet to show any significant deceleration.” The RBI’s MPC in June kept the repo rate unchanged at 6.5 per cent.
Aditya Damani, Founder and CEO, Credit Fair, said, "The RBI is expected to carry on with the current stance of 'withdrawal of accommodation, as CPI inflation has gone up to the higher-than-expected level. The repo rate is likely to remain unchanged. With the US Fed rate hike, possibility of rate cut remains distant. Having said that, MPC will definitely keep an eye on boosting consumer sentiment and capex momentum."