Inflation cools down in September, but the pressure is building up

Crop damage and import constraints could cause food prices to spike; the global energy scenario is already taking a toll on domestic fuel prices

Though the retail price inflation rate fell to a five month-low of 4.35 per cent in September, concerns were raised by several reputed agencies, from the International Monetary Fund (IMF) to Nomura, and by corporates over inflationary pressure.

In fact, wholesale price inflation also came down in September to the level seen in April, but remained elevated at 10.7 per cent. The high wholesale price inflation was partly due to a low base effect of 1.3 per cent in September 2020.

Asked why the IMF has flagged the issue of inflation at a time when the retail price rise was so slow in September, the Fund's mission chief for India, Asia and the Pacific region, Alfred Schipke, said there are supply bottlenecks which can always spill over into inflation. "So it is very important to keep an eye on inflation," he said.

He said even though the headline inflation rate, including that of the food items, has been falling, the Fund also looks at inflationary expectations.

Retail food inflation fell to just 0.68 per cent in September, from 3.28 per cent the previous month. Within that, vegetable prices continued to drop. In fact, the rate at which vegetable prices declined shot up to 22.47 per cent from 11.68 per cent over this period.

Vegetable prices

Tomatoes: However, staples such as tomatoes and onions showed a spurt in their prices in recent weeks. Tomato prices have risen sharply after standing crops were damaged following late monsoons in major growing states.

According to an official assessment, kharif tomatoes have been sown in about 247,000 hectares this year, of which the crop on about 4,000 hectares (less than 2 per cent) was damaged due to the rains. Last year, during the entire kharif season, some 250,000 hectares of land were brought under tomatoes.

An assessment done by the ministry of food processing shows that prices of tomatoes in all major markets will increase in the coming weeks, due to reduced arrivals from Maharashtra, Andhra Pradesh, Karnataka and Madhya Pradesh.

However, arrivals in Andhra Pradesh and Karnataka are expected to be steady, as these states are in the peak production period. 

Tomato prices are expected to be in the range of Rs 30-80 per kg in the retail markets during the next few weeks, with prices rising around Diwali. But they may gradually fall as new crops arrive.

Onion: The rates have risen sharply during the past few weeks due to damage of standing kharif crop. According to an official estimate, kharif onion crop has been sown in around 385,000 hectares this year of which around 59,000 hectares (around 15 per cent) has been impacted by the recent rains.

But the Centre is hopeful that since prices haven’t yet crossed the threshold limits, they will cool down in the weeks ahead. This is because despite the damage, production in 2021-22 is expected to be about 19 per cent higher than the same period last year.

A reason for the optimism is that total undamaged area from the kharif crop this year is 326,000 hectares versus 200,000 hectares the previous year.

An assessment by the Ministry of Food Processing shows that onion prices are expected to be high in the coming weeks, at Rs 30-60 per kg in the retail markets.

"The kharif crop of onions in Rajasthan is expected to hit the market this week and it is speculated that the quality will not be good as the state has also received higher-than-usual rainfall during the maturity stage of this crop," an official document showed.

Edible oils 

When it comes to edible oils, consumer price index-based infaltion rate itself showed that inflation in oil and fats rose to 34.19 per cent in September from 33 per cent in August.

Prices of all major edible oils have been on the boil for the past few months, particularly after February 2021, mainly due to a sharp rise in global rates (where a part of oilseed crop has been diverted towards bio-fuel) and also on account of low domestic stocks.

The Centre lowered import duties as many as five times since February to cool down prices. In its latest move on October 13, it virtually abolished basic customs duty on crude varieties of palm, soybean and sunflower oil and also slashed the agri cess on them till March 2022.

The decision to abolish basic customs duty came days after the Centre had empowered states to impose stock limits on oilseeds and edible oil, and directed them not to allow anyone to hold stocks equivalent to more than two months’ requirement.

The net impact of all the steps was that there has been a moderate cooling down of retail prices of some edible oils, such as mustard and palm oil, as on October 25 compared to the previous month's prices. But as compared to last year, official data shows that prices are still sharply higher.

Data sourced from Department of Consumer Affairs showed that the retail prices of groundnut oil was still five per cent higher year-on-year, mustard oil by 58 per cent, Vanaspati by 36 per, soybean oil by 36 per cent, sunflower oil by 45 per cent and RBD palmolein oil 62 per cent.

Though the Centre is hopeful that prices will moderate further as fresh imports enter the retail markets and domestic kharif oilseed crushing picks up, traders said the downside won’t be big enough as global edible oil prices are not expected to cool down soon.

As India imports 13-15 million tonnes of edible oil, of which almost 55-60 per cent is palm oil alone, any change in the global edible oil markets will have a direct bearing on the domestic markets.

Palm oil is largely imported from Malaysia and Indonesia. India is the biggest consumer of palm oil in these two markets.

Pulses

So far as pulses are concerned, the CPI inflation rate in pulses moderated from 8.81 per cent in August to 8.75 per cent in September. However, inflation rate was still elevated.

Around the time when edible oil prices started moving up, pulses rates also hardened as production is expected to be low in the kharif season due to uneven rains.

However, the first advance estimate pegged kharif pulses production at 9.45 million tonnes, or 8.74 per cent more than last year's figure. However, experts said much should not be read into the initial production estimates of pulses as the final harvest might go down in the subsequent estimates when the crop starts hitting the market full steam.

In 2020-21, the production of pulses dropped by 6.65 per cent between the first and fourth advance estimates.

To cool down prices, the Centre adopted a multi-pronged approach of first allowing easier imports and then imposing strict stock-holding limits.

The measures seem to have had limited impact on prices. Official data showed that prices of gram and arhar were five per cent lower each as on October 25 year-on-year, but urad was up by 11 per cent, and masoor by 14 per cent. 

The retail price of masur rose sharply due to lower overseas availability from imports, an official explanation showed.

Fuel prices

Besides these food items, fuel prices have been on the upswing for the last few months.

The CPI-based inflation rate in fuels rose to 13.63 per cent in September from 12.94 per cent in the previous month. The rate of price rise in petrol remained elevated even as it moderated to 22.26 per cent in September from 24.01 per cent in the previous month. The diesel inflation rate rose to 22.44 per cent from 22.06 per cent during this period. The inflation rate in these two items of fuels remained over 20 per cent since February this year.

Prices of petrol and diesel were up over 30 per cent YoY in Delhi on October 25 (See Table: Retail prices of food items and fuel in Delhi).

Table: Retail prices of food items and fuel in Delhi as on October 25

Commodity	Price (Rs/kg)	Variation in % from last month	Variation in % from last year
Gram dal	75	1.3	-5
Arhar/Tur	110	1.8	-5
Urad	120	-1.6	11
Moong	105	0.9	14
Masoor	100	0	14
Groundnut oil	189	0.5	5
Mustard oil	200	-0.5	58
Vanaspati	147	1.4	36
Soyoil	158	0.6	36
Sunflower Oil	187	0.5	45
Palm Oil	131	-0.7	25
Potato

18 0 -27

Onion

48 54.8 -13 Tomato 60 100 10

Petrol*

107.59 6.3 32.7 Diesel* 96.32 8.4 36.7 * Rs/ litre; Source : Consumer affairs department and PPAC

Experts speak

Rahul Bajoria, chief India economist at Barclays, said, "Mean reversion in prices of perishable food items is not uncommon, and given a spate of unseasonal weather-related shocks, prices have risen for key vegetables. We believe this will marginally add to inflation, but the real headwind for India remains in the form of imported price shocks, especially for energy products.”

QuantEco Research said in its note, that over the past one month, global crude oil prices have risen sharply. Reflecting this, the India crude basket, after registering an increase of three per cent in September, has hardened further by nearly 11 per cent in rupee terms so far in October. A lagged pass-through to domestic prices has meant petrol and diesel prices were revised upwards by two per cent and three per cent, respectively, so far in the month. This, along with the escalation in domestic coal prices, is likely to keep fuel inflation elevated in the near term.

Some mild downside risk could emerge if the government accepts RBI’s recommendation of lowering fuel taxes. As per QuantEco estimates, a Rs 5 reduction in petrol and diesel excise duties could offer a reprieve of 15-20 basis points on the CPI inflation, first and second order impact combined.

The issue is not only of the recent spurt in some food items and fuels, but also of core inflation.

Core inflation represents items other than food and fuels. The core CPI inflation rate remained sticky in the range of 5.3-5.7 per cent since June 2020.

QuantEco Research said it expected almost the entire adult population to get partially vaccinated before the end of 2021. In the short term, this could keep core inflation elevated with downward rigidity despite the persistence of a negative output gap.

Aditi Nayar, chief economist at Icra, said, "Looking ahead, as demand revives, producers will pass through higher commodity and logistics costs. Therefore, core retail inflation is expected to remain uncomfortable in the foreseeable future."

She said there were a number of supply-side constraints, particularly those related to global trends in fuels, energy and metal prices. Logistics challenges are also pushing up prices for many commodities.

"Therefore, it is likely that after the base-led reduction that you will see in October and November, the CPI inflation will bounce back for the remainder of FY22. Our projection is it will be 5.3-6.3 per cent for December to March," Nayar said.

Yuvika Singhal, economist at QuantEco Research, said her firm is sticking to FY22 inflation estimate of 5.6 per cent, above RBI's projections. RBI's monetary policy committee cut its projection of inflation to 5.3 per cent from earlier 5.7 per cent for FY22.

India Inc complained of rising prices of raw materials. Besides fuels, rising prices of other materials are also causing them concern. In fact, rising oil prices themselves feed into other prices.

Rising raw material costs, besides oil, could be gauged from core WPI inflation which, after remaining below the overall inflation, rose well past it in September (see Chart:). In fact, some manufacturing items such as chemicals, rubber, plastics, basic metals, steel continued to see the WPI inflation rate in double digits in September. 

Table: CPI and Wholesale inflation movement

Period	CPI in % YoY	Core CPI in % YoY	WPI in % YoY	Core WPI in % YoY
Aug-19

3.3 4.4 1.2 -0.5 Sep-19 4.0 4.2 0.3 -1.1 Oct-19 4.6 3.6 0.0 -1.7 Nov-19 5.5 3.6 0.6 -1.9 Dec-19 7.4 3.7 2.8 -1.6 Jan-20 7.6 4.1 3.5 -0.6 Feb-20 6.6 4.1 2.3 -0.6

Mar-20

NA NA 0.4 -0.8 Apr-20 NA NA -1.6 -0.8 May-20 NA NA -3.4 -1.3 Jun-20 6.2 5.3 -1.8 -0.9 Jul-20 6.7 5.5 -0.3 -0.3

Aug-20

6.7 5.6 0.4 0.6 Sep-20 7.3 5.5 1.3 1.2 Oct-20 7.6 5.7 1.3 1.8 Nov-20 6.9 5.7 2.3 2.9

Dec-20

4.6 5.5 2.0 4.4 Jan-21 4.1 5.5 2.5 5.5 Feb-21 5.0 5.7 4.8 5.9

Mar-21

NA NA 7.9 7.5 Apr-21 NA NA 10.7 8.7 May-21 NA NA 13.1 10.4 Jun-21 6.3 5.9 12.1 10.5

Jul-21

5.6 5.7 11.6 11.2 Aug-21 5.3 5.6 11.4 11.1 Sep-21 4.4 5.5 10.7 11.1

Source: NSO, Office of the Economic Advisor, Ministry of Commerce and Industry

NA: Detailed data for Mar-May 2020 is not available