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No near-term reprieve? Festival demand to fuel inflation further, say economists

Aug 16, 2023, 15:30 IST
Business Insider India
Representational imagePixabay
  • Even as core inflation cools, food and beverage inflation in July inched up to its highest in about three and a half years.
  • Pulse prices remain high in spite of government interventions and its sowing is also lower than last year.
  • The effect of many government interventions will be visible in the September inflation print, say experts.
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Retail inflation hit a 15-month high of 7.4% in July, and now economists are concerned about its trajectory in the next few festive months. The Reserve Bank of India (RBI) has recently increased its inflation projections, but the heightened inflation numbers might not come within them either, they worry.

“RBI had forecast 6.2% inflation for Q2, which will mean that inflation has to average 5.6% in the next two months. But will this happen?” questions Madan Sabnavis, chief economist at Bank of Baroda.

Even as core inflation is cooling down, food and beverage inflation continues to inch up and in July they surged to 10.6% — the highest in about three and a half years. Apart from higher temperatures in some areas, flooding and rainfall increased the logistics costs, adding to pricing pressures.

The ‘pulse of the economy’


Vegetable prices continued to remain hot and rose by 37%, but the July print also saw double digit inflation in pulses, cereals and spices.

Inflation in pulses remained elevated at 13.3% in spite of government’s efforts to increase domestic availability of tur daal through stock limits, offloading buffer stock — which have not been able to stem the price rise.

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Moreover, the sowing data of pulses is 8% lower than what it was last year, and as the monsoon is expected to August and September — there are fewer chances of a cool down soon.

“Inflationary pressures in other categories such as milk and spices are equally concerning as the demand for these is going to strengthen with the upcoming festive season,” said a report by CARE Edge.

“There was a degree of offset to rising food prices from the sequential decline in egg, meat and fish, and edible oil prices. Lower demand for non-vegetarian items in the current season drove the prices of egg and meat lower, while edible oil prices continued to decline owing to lower import costs,” said a report by Barclays.

The prices of edible oils have hit a negative zone, but global edible oil prices have been picking up due to supply disruptions – providing little comfort for the numbers ahead. “True, this (vegetable inflation) can be temporary but it takes time for prices to come down to temper these rates. Therefore, we need to brace for another high number before a turnaround takes place,” says Sabnavis.

July inflation print



ItemInflation YoY
Vegetables37.3%
Cereals13%
Pulses13.3%
Milk8.3%
Spices21.6%
Eggs 2.25
Edible Oils-16.8
Meat & fish3.82

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Source: Government data

Govt interventions to show in September print


On the other hand, the government has been taking up several measures to contain inflation. Apart from importing and procuring them from producer states, the government also offloaded wheat and rice stocks through e-auctions and banned non-basmati rice exports.

Its effects will be visible with a lag effect, in the September inflation print says J M Financial. “The pricing pressures in the food category also reflected in the hotter than expected WPI inflation in July (-1.4% vs -2.7% estimated), however the deflationary trend continued,” it said, adding that it expects RBI to revise its inflation projections upwards yet again.

In spite of the many factors like the El Nino effect and others expected to play out, most economists do not expect a rate hike anytime soon. “We continue to believe that the policy rates have peaked and we do not expect rate cuts in 2023,” said J M Financial, adding that comfortable core inflation in July would act as a buffer for RBI to not tinker with the policy rates.

High inflation will bring for more challenges like and the RBI is aware of them says a CARE Edge report. “Higher food prices for longer could impact households’ purchasing power and dent consumer sentiment. This could have a bearing on the growth prospects, especially amid external headwinds and uncertainty regarding rural recovery,” it said.
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