Oils And Fats To Remain In Deflation Zone For FY24 Despite El Nino Concerns
Deflation in prices of oils and fats will continue for the remaining months of 2023-24, despite recent sequential upticks and El Nino tightening its grip in the coming months. This will result in the category staying in deflation zone for entirety of the current financial year.
At present, oils and fats remains the only category in the Consumer Price Index (CPI) basket experiencing deflation after a reversal of trend in the prices of meat and fish in June.
“In year-on-year terms edible oils inflation within CPI is expected to remain in negative territory in the remainder of FY24, due to supportive base-effects,” said Gaura Sengupta, Economist, IDFC First Bank.
It was in February this year when the deflationary trend for the category began with oils and fats contributing -0.5 per cent in the CPI print for the month. In the latest print for August, the figure came in at -15.3 per cent.
Why Deflation?
What led to this long running deflationary trend for the oils and fats category is reduction in international prices weakening import demand for edible oil at the global level and measures rolled out by the government.
There has been a notable decline in global prices of vegetable oil and dairy products since January 2023, with each category contracting by 10.4 per cent and 17.2 per cent, respectively, said Sarbartho Mukherjee, Senior Associate Economist, CareEdge Ratings.
Another reason for the trend is said to be the reduction in import duties by the Indian government to tame rising prices of commodities in the edible oil category.
According to the Economic Survey 2021-22, oils and fats was the major driver of inflation in the foods and beverages category with a contribution of around 60 per cent of food inflation in FY22.
“The central government has played a role in this deflationary trend as it reduced the import duty on refined soyabean oil and sunflower oil to 12.5 per cent from 17.5 per cent,” said Mukherjee.
Little Impact
However, due to being the sole category observing deflation in last three CPI prints, the influence of oils and fats category on food inflation has largely been muted despite having a weight of around 27 per cent in the food basket.
Within the CPI Index, edible oil inflation has averaged at -15.7 per cent on year, between April and August this year. In contribution terms, edible oil prices have reduced 0.6 ppt from headline inflation in the period, said Sengupta.
India’s retail inflation moderated to 6.83 per cent in August from a 15-year low of 7.44 per cent in July, primarily due to a relaxation in vegetable prices.
Going forward, economists are of opinion that food inflation concerns are far from over due to double-digit inflation in certain food categories.
“While the trajectory of those in inflation can’t be predicted currently, there is some more room for oils and fats to stay in the deflation zone,” said Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
El Nino
Where the uncertainity exists for the current drivers of inflation - cereals and pulses, the scope of oils and fats turning to the inflation side in current fiscal seems narrow also due to global factors.
“The deflationary trend is expected to continue in the near term as Malaysian future prices for palm oil are broadly conducive,” said Paras Jasrai, Senior Analyst, India Ratings & Research.
However, according to World Meteorological Organization, El Nino will keep the worries for prices of food items alive till the beginning of 2024.
Considering the last two CPI data prints, a sequential increase in the prices of oils and fats has led to a reversal in the deflationary trend. The expected fall in yield of palm oil production due to El Nino conditions is seen further increasing the prices.
“The prices of edible oils have bottomed out and they may slowly recover in the coming months. Production of crops is also expected to be hit so it might have a bearing on their prices,” said G Chokkalingam, Founder, Equinomics Research.
