Suhani Adilabadkar
With retail inflation coming above 5% in June 2024, it’s easier for RBI to say no. In the last monetary policy committee (MPC) meeting, the Reserve Bank of India with a majority of 4:2 voted in favour of maintaining the status quo. Repo rate was unchanged at 6.5% in May 2024. The RBI governor, Shaktikanta Das had warned against persistent high food inflation in the last MPC meet. He had reiterated that aligning inflation to the 4% target is extremely important before a repo rate cut decision is taken. Retail inflation in June 2024 came in at 5.08%. Corresponding inflation rate for rural and urban is 5.66% and 4.39%, respectively in June 2024.
And the culprit remains the same for the higher-than-expected June inflation, high food price inflation. Food & beverages basket consists of cereals, milk, oil, pulses, spices, sugar, fruits, vegetables, non-alcoholic beverages and prepared meals.
Cereals have the highest weightage of 9.67% of CPI basket followed by milk and vegetables at 6.6% and 6% respectively. In the month of June, vegetable prices soared due to extreme heat wave conditions and delayed monsoons. Vegetable price inflation is nearly 30% in June 2024, pushing food inflation beyond 9%. Food & beverages has the highest weightage of 45.86% in the consumer price index. As a result, after moderating 35 basis points from 5.1% in January 2024 to 4.75% in May, 2024, headline inflation is now back to January levels.
Reserve Bank of India (RBI) predicts retail inflation to be around 4.5% in 2024-25 and to fall to 3.8% in Q2FY25 (July-September period) aided by monsoon gods. In lay man’s language, as monsoon showers spread across the country, vegetable prices are expected to cool down from the month of July. Monsoon activity has definitely picked up in July with heavy rainfall in various parts of India. But heavy rainfall has also led to damage of crops and tight supply for various vegetable varieties. Heat waves, heavy rainfall, flash floods result in crop losses leading to low supply of vegetable fruits and other perishable food items every year. And with lower supply of vegetables & fruits and the demand remaining the same, prices increase.
Though vagaries of nature cannot be controlled, India needs to strengthen its supply chain, storage warehouses and cold chains to manage supply of perishable food items during scorching heat waves and unpredictable monsoon periods. While the government has taken a number of significant steps and implemented schemes such as ‘Pradhan Mantri Kisan Sampada Yojana’, the farming community is still struggling with its post-harvest losses in the form of theft or wastage. These structural difficulties dissuade farmers from increasing vegetable & fruits production and push them towards cereals and pulses farming which has government support through minimum support price mechanism (MSP). And as supply and demand imbalance increases, so will vegetable price inflation impacting family budgets.
With higher food inflation and strained monthly budgets, the purchasing power of a common man is reduced, altering consumer spending patterns and lower economic growth. FMCG, apparel and other consumer durable companies are witnessing lower growth in their economy product segments and strong growth in premium products. A middle-class family tends to maintain its food allocation, cutting down on other discretionary spend. Thus, food inflation driven by vegetables & fruits, hitting the Indian middle class the hardest should not be viewed as a seasonal bump. Vegetable price inflation has been on the rise for the past seven months. Hopefully, food supply chain infrastructure in India gets its due in the upcoming Union Budget.
