Food Inflation Bites Indian Economy: RBI Sees Uptick in Vegetable Prices; Monsoon Key to Relief

Rising Food Inflation in India

India’s food inflation surged in May 2024, reaching 8.7% in April, up from 8.5% in March. Rural consumers faced a sharper increase of 8.75%, driven by climate-related supply disruptions affecting vegetables and fruits.

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Food vs. Fuel Inflation

While CPI-based inflation eased to 4.83% in April, food inflation remains a significant concern. Key categories saw steep rises: vegetables (+28% YoY), pulses (+17% YoY), and cereals (+8.6% YoY). Meanwhile, fuel inflation dropped to -4.2% YoY in April, thanks to LPG price cuts in 2023 and 2024, and stable petrol and diesel prices expected in Q1FY25.

Monsoon's Crucial Role

Das noted that an above-normal monsoon could ease food inflation pressures, particularly for cereals and pulses. However, uncertainties around the food price outlook require close monitoring.

Projections and Economic Insights

Assuming a normal monsoon, the RBI projects CPI inflation for 2024-25 at 4.5%, with quarterly estimates ranging from 3.8% to 4.9%. Aditi Nayar, Chief Economist at ICRA, expects food inflation to peak in the next two months before declining as base effects become favorable.

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Wholesale Price Index and Core Inflation

Higher food prices pushed WPI-based inflation to a 13-month high of 1.26% in April. Analysts suggest that easing food inflation and absence of weather shocks could provide relief. Shishir Baijal, Chairman of Knight Frank India, anticipates an above-normal monsoon could lead to lower interest rates by the end of 2024.

RBI's Stance on Interest Rates

The Monetary Policy Committee, led by Das, kept the benchmark repo rate unchanged at 6.5% for the eighth consecutive time and raised the GDP growth forecast for FY25 to 7.2%.

Conclusion

Rising food inflation, driven by climate factors, poses a significant challenge to the Indian economy. A favorable monsoon is crucial for easing these pressures, with the RBI cautiously optimistic about balancing inflation risks with growth prospects.

Also Read: RBI Monetary Policy: Governor Shaktikanta Das Announces Repo Rate Unchanged at 6.5%