High food prices raise concerns but improved monsoon offers hope for RBI: SBI report

New Delhi: The ongoing volatility in the prices of key food items such as tomatoes, onions, and potatoes (collectively known as TOP) and pulses continues to pose significant challenges for the Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI), highlights a report by SBI.

"Current volatility in prices of TOP and pulses continues to challenge the MPC, keeping the headline above target at 5.1 per cent in June 2024," said the report.

The report highlighted that this instability in food prices has kept the headline Consumer Price Index (CPI) inflation above the targeted level, reaching 5.1 per cent in June 2024. While the inflationary pressures remain a concern, the report stated that there is hope on the horizon due to the currently above-normal monsoon and increased sowing activity, which are further supported by the potential onset of a La Nina event later in the year.

"The currently above-normal monsoon and sowing, backed up by a potential La Nina event later, promise reprieve in later quarters," said the report.

Importantly, the report added that it is now expected that the CPI will remain above the RBI's medium-term target of 4 per cent in all quarters up until the first quarter of FY26. This persistent overshoot highlights the ongoing inflationary pressures in the economy.

"Notably, now the CPI is expected to be above RBI's target of 4 per cent in all quarters till Q1FY26," the report added.

However, the report noted that the Monetary Policy Committee expects a moderation in inflation during the fourth quarter, which is anticipated to help keep the overall CPI projection for FY24 unchanged at 4.5 per cent.

The SBI report also believes that the volatility in food prices, driven by uneven spatial and temporal distribution of monsoon rains, presents an upside risk to the current inflation projections. As a result, SBI maintains its CPI estimate for FY25 at 4.7 per cent year-on-year.

In the latest MPC meeting on Wednesday, RBI Governor Shaktikanta Das said inflation will moderate from July onwards as the monsoon has improved and global food prices have shown signs of easing in July.

Das said, "Global food prices showed signs of easing in the month of July after registering an increase since March 2024."

A degree of relief in food inflation is expected from the pickup in southwest monsoon and healthy progress in Kharif sowing. Buffer stocks of cereals continue to be above the norms, according to RBI Governor Shaktikanta Das.

Das added, "Assuming a normal monsoon and taking into account the 4.9 per cent inflation print, Q1 CPI inflation for the current financial year (2024-25) is projected at 4.5 per cent, with q2 at 4.4 per cent, Q3 at 4.7 per cent and Q4 at 4.3 per cent. CPI inflation for the first quarter of next financial year (Q1 2025-26) is projected at 4.4 per cent."