RBI MPC: Food prices driving retail inflation, experts see a status quo on rates

Volatile food prices and continued high inflation in items including cereals, pulses and vegetables has remained a source of concern for policymakers, and is seen as one of the reasons why the Monetary Policy Committee of the Reserve Bank of India (RBI) may choose to keep rates unchanged when it announces the first monetary policy review of FY25 on Friday.

In its last policy review in February, the RBI had noted that going forward the inflation trajectory would be shaped by the evolving food inflation outlook. It had projected CPI inflation at 5.4% in 2023-24 with the fourth quarter at 5%. Assuming a normal monsoon, it had forecast CPI inflation to ease to 4.5% in 2024-25. The RBI is expected to review its inflation forecast in the upcoming policy review.

From 4.9% in October 2023, headline consumer price index based inflation or retail inflation rose to 5.7% in December before easing to 5.09% in February this year. In all these months, food inflation has been consistently higher than the headline retail inflation at 6.24% in October, 8.7% in December and 7.76% in February.

This is because while core inflation has seen some deflation, food inflation has been stubbornly high due to stickiness in prices of food items including vegetables, cereals, pulses and spices.

In February 2024, vegetable inflation was up at 30.3% year on year, while pulses inflation was up at 18.9% and spices at 13.5%. Cereal inflation had tempered down to 7.6% in February.

“Sustained inflationary trend in non-perishable food categories, such as pulses and spices, raises concerns about the potential broadening of price pressures due to their inherent stickiness. However, it is worth noting that supply-side interventions have played a pivotal role in tempering prices, particularly in cereals,” said a note by CareEdge Ratings.

Disinflationary trends in cereal inflation are evident, with a decline from an average of 10.3% in Q3 FY24 to an average of 7.7% in the months of January and February. “The recent uptick in global commodity prices also warrants close monitoring, with Brent crude and industrial metal prices up 4.4% and 5.5% since the last MPC meeting,” it further noted.

While retail inflation is seen to ease in coming months due to a favourable base effect and there are hopes that food prices may cool down due to a normal monsoon, prices of at least some items may need to be monitored.

“Going forward, we expect wheat prices to decline with fresh harvest arriving in the market and tomato prices to stay benign, but onion prices could see some near-term firming up because rabi harvest is seen about 20% lower,” said Pushan Sharma, Director- Research, CRISIL Market Intelligence and Analytics.

Meat and fish inflation at 5.21% and egg inflation at 10.69% in February are also expected to ease further in March although analysts expect some deceleration in food inflation. “Meat and fish prices likely accelerated again in March, in part driven by seasonal demand during the month of Ramzan,” said a note by Barclays. The agency expects CPI inflation to ease further to 4.7% in March with food CPI at 7.3%.

Official data for retail inflation in March will be released on April 12 and provide a clearer picture of food prices.