How RBI Has Underestimated Monsoon Impact In Projecting Inflation For September Quarter

RBI in its previous revision had projected CPI for Jul-Sep quarter at 6.2 percent. The projection lags way behind the current expected figure for the quarter
India received below normal rainfall in the monsoon season
India received below normal rainfall in the monsoon season

India’s retail inflation moderated to 6.83 percent in August from a 15-month high of 7.44 percent in July, due to an ease in vegetable prices, according to data released by the Ministry of Statistics and Program Implementation on Tuesday. With September data still to come in the future, the figures currently signal that CPI is set to average way above the Reserve Bank of India’s projection for Jul-Sep quarter.

Days after RBI announced its policy review in August; inflation in India recorded to a 15-month high on back of a surge in food prices, particularly of tomato. Food inflation for July stood at 11.5 percent, with cereals and pulses also contributing to the rise. The reason behind it was attributed to below normal rainfall and extreme weather conditions seen in July.

However, after measures rolled out by the government and arrival of fresh crop, tomato prices saw a sequential decline of around 20 percent in August, bringing food inflation to 9.9 percent. Yet, the continued scanty rainfall has kept headline inflation firmly elevated above RBI’s tolerance band of 2-6 percent and also its estimate for the current quarter.

“While we expect the CPI inflation to print in the range of 5.3-5.5 percent in September 2023, this will still entail an average of 6.6 percent for Q2 FY24, well above the MPC’s August 2023 forecast for this quarter,” said Aditi Nayar, Chief Economist, ICRA.

Economists are of view that India’s average CPI for Jul-Sep quarter will likely settle at 6.6-6.8 percent.

What Was RBI’s Assessment For Inflation?

In its August policy review, RBI had scaled up its projection for Jul-Sep quarter to 6.2 percent from 5.2 percent, and to 5.7 percent from 5.4 percent for Oct-Dec quarter. The change in quarterly estimates led the central bank to raise its inflation forecast for FY24 to 5.4 percent from 5.1 percent.

“Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressure on the near-term headline inflation trajectory,” said RBI Governor Shaktikanta Das in its August monetary policy statement. Further, he said that the jump in inflation is likely to correct with fresh market arrivals.

However, the CPI prints for July and August suggest that the RBI’s realisation of the uneven monsoon was not sufficient. To meet the central bank’s projection for the current quarter, India’s retail inflation will have to arrive at 4.4 percent in September, which seems highly unlikely to happen as of now.

Considering the cloudy outlook posted by analysts for September as well, food inflation is expected to continue troubling India despite a moderation in vegetable prices as both cereals and pulses have risen almost 1.5 percent on month in August.

“While overall food inflation has moderated, the worrying aspect is that the sequential upward momentum has continued for some food items like cereals, pulses and milk,” said Rajani Sinha, Chief Economist, CareEdge Rating. “There is risk of further upward pressure on food inflation given the skewed rainfall and low reservoir levels.”

October Monetary Policy

Before food prices skyrocketed in India, RBI in its June policy had revised its estimate for Apr-Jun quarter and Jul-Sep quarter to 4.6 percent and 5.2 percent, respectively. The projection for the first quarter had then fallen in line with the actual data; following the release of June CPI data which recorded retail inflation at 4.81 percent.

In the upcoming October policy review, RBI is expected to revise its estimate for the current and following quarters. However, what will be crucial is its assessment of the monsoon.

A major challenge going ahead for India is said to be the El Nino phenomenon which causes dry conditions and disruptions in crop production. While the concerns for El Nino have been gathering from the previous quarter, its peak impact is likely to be observed in the coming months.

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