All eyes are on the Reserve Bank of India’s (RBI) rate-setting panel which commenced its three-day bi-montly meeting on August 8, amid rising food prices.
At the end of this meeting on Thursday, tomorrow, the Monetary Policy Committee (MPC) will present its decision on key policy rate hike, inflation forecast and GDP outlook. However, the focus will be on how India’s central bank is planning to cope with the rising inflation print.
India’s retail inflation witnessed an uptick of 4.81 per cent in June after hitting a 25-month low of 4.25 per cent in May on an annual basis. Here are the key factors which could shape the MPC policy decision:
Weather
Disruption in monsoon is a huge setback for a country which is heavily dependent on agriculture. Uneven rains have been a concern for the RBI as well. An erratic rainfall pattern in the ongoing monsoon season has led to lower sowing of the Kharif crops. This, in turn, will act as a catalyst for inflation. Hence, the RBI may take it into consideration to keep prices in check for the upcoming months.
India’s weather department had said that the country is likely to receive below-average rainfall in August due to the El Nino weather pattern.
Rainfall in India is a major source of water needed for farming and to fill reservoirs and aquifers stored for further use. Rainfall in India in June was 9 per cent below average, but in some states, the rainfall deficit was as much as 60 per cent below normal.
“Sowing of summer crops was delayed due to scant rainfall in June. The crops are not big enough to adjust to stress if rainfall falters in August, which could affect their vegetative growth,” a Mumbai-based dealer with a global trade house told Reuters.
Red hot veggie prices
The Indian curries started costing more in July with prices of tomato, potato and onion peaking amid shortage.
The prices of tomatoes, chillies and ginger were as high as Rs 300/kg, 100/kg and Rs 400/kg respectively. The high demand paired with erratic rains pushed the prices and continued to burn the pockets of Indian citizens.
It is most likely to influence the food inflation which accounts for a major chunk of the Inflation basket at nearly 40%.
Deutsche Bank India economists led by chief economist Kaushik Das, in a report on Monday ahead of the monthly inflation print and the RBI’s monetary policy review, had said that the July consumer price-based inflation index (CPI) is likely to print at 6.7 per cent on-year as against 4.8 per cent in June, reported PTI.
Therefore, to cushion the impact of the rising food prices, the RBI might consider the measures to bring the prices down.
Vegetable prices, which have a 6 per cent weightage in the overall consumer price index (CPI), hit a seven-month high in June, rising 12 per cent month-on-month.
Prices usually ease from August, when the harvest makes its way to the market, but this year, traders expect prices to remain high until October as supplies stay tight.
“The monsoon is disrupting the vegetable supply chain. This year, we are going to witness higher vegetable prices for a prolonged period,” Anil Patil, a Mumbai-based trader, told Reuters recently.
Expensive staples such as onions, beans, carrots, ginger, chillies and tomatoes not only feed voter discontent ahead of state elections in the next few months, but higher prices are also likely to stoke retail inflation, which is expected to hit a seven-month high in July, diminishing the potential for the RBI to lower rates this year.
Peer pressure
The Federal Reserve on July 26 hiked its key policy rate by a quarter percentage point to 5.25 per cent. It has been on a rate hike spree over the past 18 months to curb inflation. On August 3, Bank of England also raised its key rate for the 14th time by a quarter point to bring its stubbornly high inflation within control.
The rate hikes in big economies might impact the RBI’s decision this time as it has been following a similar strategy to cushion inflation. However, to cushion the impact of the previous rate hikes, the MPC paused its consecutive hikes in its June policy review. RBI Governor Shaktikanta Das had, however, called it a “pause, not a pivot”, thus keeping open the scope for further hikes.
The rise in prices of commodities globally has also been a cause of the constant rate hikes. Recently, Russia pulled out of the Black Sea grain deal which sparked a volatility in price.
“Russia’s actions to take such a significant amount of food products off the world markets will exacerbate hunger in some of the hardest-hit areas of the world, including Africa,” Reuters quoted White House Press Secretary Karine Jean-Pierre as saying. She said that the Black Sea grain initiatives had resulted in more than 32 million tons of grain being exported to rural markets.
What experts say
According to an ET poll of 15 respondents, the RBI’s MPC is seen keeping the repo rate unchanged at 6.50 per cent and maintaining its prevailing stance of withdrawal of accommodation.
Similarly, a July 13-31 Reuters poll of 75 economists showed the central bank was expected to keep its repo rate unchanged at 6.50 per cent at its August 10 policy review.
“Inflation is expected to head towards the 6 per cent mark because of vegetables and pulses prices going up. We expect this to be temporary in nature and therefore there is no case of increasing rates. The fact that other central banks have been increasing rates may not be a primary factor but could be another justification for not changing the repo rate,” Madan Sabnavis, chief economist, Bank of Baroda, said.
The MPC has raised the repo rate by a total of 250 basis points from May 2022 to February 2023 to tackle elevated inflation.
The trend is expected to continue in July, with several economists predicting CPI inflation at 6.0-6.5 per cent as against 4.81 per cent in June. The MPC’s tolerance band for CPI inflation is 2-6 per cent.
