Portfolio

Despite a brief respite, price-rise worries persist

Radhika Merwin BL Research Bureau | Updated on August 14, 2018 Published on August 14, 2018

Futuristic view The RBI action can provoke a differentiated response on different occasions istock

Further rate hikes by the RBI in the current fiscal year cannot be ruled out

The CPI inflation falling to 4.2 per cent in July from 4.9 per cent in June, has rekindled hopes of the RBI hitting the pause button, after two consecutive rate hikes. But the brief respite has been mainly driven by the sharp fall in vegetable prices — tomato in particular — owing to a high base. With food prices likely to remain steady (monsoon still a wild card), inflation risks remain on the upside. Waning impact of base effect, an elevated core inflation and falling rupee are key risks to RBI’s inflation forecast of 4.8 per cent for the second half of FY19.

A possibility of two more rate hikes by the RBI in the remaining part of FY19, cannot be ruled out.

Tomato crush

What led to the significant fall in CPI inflation in July was the sharp fall in food inflation — from 3.1 per cent in June to 1.7 per cent in July. These levels were last seen in the months following demonetisation when food inflation remained at 1-2 per cent, before slipping into the negative territory in May and June of last year. Aside from the problem of plenty in pulses and vegetables, GST uncertainty that led to traders deferring buying, impacted food prices.

 

 

 

But the trend started to reverse from August last year. A look at the retail prices put out by the Department of Consumer Affairs, reveal that since August, as prices of tomato and onion started to rise, vegetable inflation moved into the positive zone — shooting up to 7.47 per cent in October. In fact, in October, tomato and onion prices doubled over the previous year.

It is on this high base that vegetable prices look sedate this year. In the case of tomato in particular, prices had gone up by 89-120 per cent in July and August last year. As of end-July this year, tomato prices fell by a steep 50-odd per cent. The sharp fall in tomato prices dragged the overall vegetable inflation to negative 2.2 per cent in July this year.

Pravesh Sharma, Founder and CEO, Kamatan, an agri marketing start-up, explains: “in July last year, there was an unusual spike in tomato prices. To some extent, the sharp fall in prices this year is on account of the high base. Potato, onion and tomato that have the highest weightage in vegetable basket — all are surprisingly seeing mild prices this monsoon. Supply side responses such as better storage etc. are helping.”

Inching up

Interestingly, though onion prices may not have spiked as expected at this time of the year, they have been steadily moving up. Both onion and potato prices have been increasing by 30-40 per cent YoY over the past two months. Also, even as tomato prices have fallen sharply from last year levels, they have been moving up since April this year, as per retail prices put out by the Department of Consumer Affairs.

 

 

Hence, as the base effect wears out, vegetable inflation could start to move up once again. The big picture on the monsoon still remains unclear.

Cereals has the highest within the food basket, followed by milk and vegetables. The prices of cereals have been on the rise since February this year — from 2.1 per cent in February cereals inflation is gone up to 2.9 per cent in July.

The sharp rise in core inflation remains a concern. Despite the marginal dip in July it still remains high at 6.3 per cent — up sharply from 3.9 per cent in July last year. Rise in global crude prices have led to fuel inflation moving up to 7.96 per cent in July from 7.2 per cent in June and 5.8 per cent in May. Uncertainty over future price movements persist. Other than this, risks highlighted by the RBI continue to be an overhang — significant rise in households’ inflation expectations, rising input costs, fiscal slippage at Centre and State level, higher-than-average hike in MSPs for kharif crops, and staggered impact of HRA.

Macroeconomic imbalances are also a concern. The rupee is one of the worst performing currencies this year — the recent sharp fall has only accentuated concerns over the impact it may have on inflation as also any extreme measures that the RBI may have to take to rein in the currency.

Published on August 14, 2018

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