RBI raises inflation projection for H2 FY20 on spike in vegetable prices

The Reserve Bank of India (RBI) on Thursday raised its inflation projection to 5.1-4.7 per cent for the second half of the current fiscal on the back of spike in prices of vegetables such as onion and tomatoes.

The central bank had earlier estimated headline inflation at 3.5-3.7 per cent for the second half of the ongoing fiscal.

"Going forward, the inflation outlook is likely to be influenced by several factors. First, the upsurge in prices of vegetables is likely to continue in immediate months; however, a pick-up in arrivals from the late kharif season along with measures taken by the government to augment supply through imports should help soften vegetables prices by early February 2020," the RBI said in its fifth bi-monthly monetary policy review of the fiscal.

There are incipient price pressures seen in other food items such as milk, pulses, and sugar likely to be sustained, with implications for the trajectory of food inflation, it said.

Retail inflation increased sharply to 4.6 per cent in October, propelled by a surge in food prices.

Talking about drivers of the Consumer Price Index (CPI), it said, food inflation spiked to 6.9 per cent in October a 39-month high pushed up by a sharp increase in prices of vegetables due to heavy unseasonal rains.

Prices of onions, in particular, shot up by 45.3 per cent in September and further by 19.6 per cent in October, it said.

Inflation in several other food items such as fruits, milk, pulses and cereals also increased, reflecting diverse factors the cost push of fodder prices in the case of milk; decline in production and sowing area of pulses; and minimum support price effects. Sugar and confectionery prices moved out of deflation in October as sugarcane output shrank on an annual basis, it said.

However, it said domestic demand has slowed down, which is being reflected in the softening of inflation excluding food and fuel. Crude oil prices are expected to remain range bound, barring any supply disruptions due to geo-political tensions.

"Taking into consideration these factors, the CPI inflation projection is revised upwards to 5.1-4.7 per cent for H2 of 2019-20 and 4.0-3.8 per cent for H1 of 2020-21, with risks broadly balanced," it said.

It is, therefore, prudent to carefully monitor incoming data to gain clarity on the inflation outlook.

"Similarly, the forthcoming union budget will provide better insight into further measures to be undertaken by the Government and their impact on growth," it said.