Food prices push India's inflation rate beyond RBI's tolerance limit

India's retail inflation hit a worrying 14-month high of 6.2 percent in October, breaching the Reserve Bank of India (RBI)'s medium-term tolerance band of two to six per cent for the first time in over a year. The country's consumer price index (CPI)-based inflation last month was driven by a sharp uptick in food inflation, with vegetables (onions and tomatoes), edible oils, and beverages contributing the highest to the inflation basket.

India's food inflation--the annual inflation for food items, which accounts for nearly half of the consumption basket--rose to 10.87 percent in October 2024 compared to 9.24 per cent in September and 6.61 percent in the year-ago period. The National Statistics Office (NSO) data showed a significant inflation decline in the 'pulses and products', eggs, 'sugar and confectionery' and spices subgroups in October. "High food inflation in October is due to an increase in the inflation of vegetables, fruits, oils, and fats," said the NSO.

Drastic fall in purchasing power

Rising food prices have drastically reduced the purchasing power of middle-income households, affected corporate earnings and hurt economic growth. Food inflation has remained the pain point for policymakers as they struggle to reduce rates, which is impacted sideways due to domestic factors, external headwinds, and geopolitical conflicts.

India's core (CPI excluding food and beverages, fuel and light, and petrol and diesel for vehicles) inflation rose to a 10-month high of 4 percent in October from 3.8 percent in September, the highest level since November 2023. The overall food inflation in October was the highest in 15 months.

According to Vinit Bolinjkarof  Ventura Securities, broad-based inflation extends into core items, indicating that price pressures are not limited to volatile sectors and could signal a longer-lasting trend.

“This rise in essential costs is already affecting consumer demand, particularly for discretionary goods, as households prioritise basic needs, leading to weaker sales growth reported by many consumption-focused companies,” he said.

Headline CPI, excluding food and beverages, rose by 3 percent compared to the April-September average of 2.4 percent, suggesting that food remained the driving force behind high prints. The personal care and effects component sustained the upside, rising 1.9 percent in October from 1.2 percent rise in September, reflecting a rise in gold prices and festive demand.

Perishables' prices shoot up

“Persistent rise in perishables' prices amid inclement weather and supply disruption and concentrated rains and the sharp upswing in prices of oilseeds post-hike in import duty drove food prices higher,” the brokerage firm Elara Securities pointed out.

According to Aditi Nayar of ICRA Ltd, food and beverage inflation surged to an eye-watering 9.7 percent in October.the firmest since mid-2023, from 8.4 percent in the previous month, amid an uptick in seven of the 12 food groups. 

Vegetables inflation hardened to a sizzling 57-month high of 42.2 percent compared to 36 percent in September, which weighed on the food and beverages and, consequently, the headline inflation print in the month. Sequentially, prices of vegetables saw the sharpest jump.

The inflation rate for cereals was 6.94 percent compared to 6.84 percent in September, while that for pulses was 7.43 percent against 9.89 percent a month earlier. The inflation rate for oil and fats was 9.51 percent compared to 2.47 per cent in the previous month, mostly due to an increase in edible oil prices.

According to Suman Chowdhury of Acuité Ratings, while the fading of the favourable base factor has contributed to the surge, continuing high prices of vegetables have been a key factor in the high figure. Tomato prices have soared due to heavy rains in Sept-Oct, damaging crops in key producing states like Karnataka, Andhra Pradesh. 

"Additional pressure persists from edible oils and pulses. The government raised import duties on crude soybean, palm, and sunflower oils from 5.5 percent to 27.5 percent and on refined edible oils from 13.7 percent to 35.7 percent in September, contributing to the recent price surge," said Chowdhury.

Any respite in near-term?

Going forward, economists say that all eyes will be on the kharif harvest season and the progress in rabi sowing. According to Sujan Hajra of Anand Rathi Shares and Stock Brokers, while volatile food inflation is a major concern, the good monsoon and better rabi harvest would result in lower food price volatility in the next quarter. 

Upasna Bhardwaj of Kotak Mahindra Bank expects the uptick in food prices to keep headline inflation higher than five percent even in the next reading before the seasonal downturn begins to bring down inflation.

(By arrangement with livemint.com)

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