Surging food prices seen pushing up India’s inflation in June

SPIRALING prices of tomato, onion and pulses pushed up India’s retail inflation in June, reaffirming expectations of a hawkish hold from the central bank for the rest of the year.

After moderating for four months, consumer price inflation accelerated to 4.81 per cent in June, compared with a 25-month low reading of 4.25 per cent in May, Statistics Ministry data showed on Wednesday (Jul 12). A Bloomberg survey of economists had expected a gain of 4.6 per cent.

Food prices, which make for about half of the index, rose 4.5 per cent, while fuel and light prices gained 3.9 per cent. Clothing and footwear prices increased 6.2 per cent and housing prices rose 4.56 per cent.

The gains are broadly in line with the Reserve Bank of India’s (RBI) projections, but an impact on supply chains and crops due to an erratic weather may fan the prices further.

That means the central bank will take longer to reach the mid-point of its 2 per cent-6 per cent target, delaying a pivot to rate cut to support growth. It left the rates unchanged in the last two meetings to see the impact of past hikes on inflation.

High borrowing costs may further dent demand in Asia’s third-largest economy where growth has lost pace tracking a global slowdown. It may also pause the rally in India’s stocks which have touched record highs, according to some market watchers.

Economists are crunching numbers to gauge the impact of the sharp acceleration in food prices on headline inflation in the coming months. A jump of more than 400 per cent in the prices of tomato since the start of the year will likely push up inflation beyond the RBI’s target ceiling in the July reading due next month.

“The weather-related price disruption has also been seen in other vegetables and most notably in onion prices,” said Anubhuti Sahay, an economist with Standard Chartered Bank. She sees the risk of inflation touching 6 per cent in July if the increase in food prices is sustained.

Prices of tomato, onion and potato – key ingredients in an Indian meal – are major contributors to volatility in retail inflation, even if they make up a small portion of the index, according to a study by the RBI.

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Weaker monsoon in some parts of the country and floods in other areas is contributing to soaring prices of vegetables and pulses. After months of blistering heat, northern India is seeing deluge that has led to a widespread damage.

The central bank will carefully parse through the data before its Aug 10 decision. In the June meeting, the rate setters said they would keep a close vigil on upside risks to inflation, including the spread of the monsoons and geopolitical tensions.

The intensity of the rise in prices of perishable items “has shocked everyone” but the RBI may remain on a prolonged pause as the spike was led by supply-side factors, Garima Kapoor, an economist with Elara Securities India Pvt. said in an interview on Bloomberg Television earlier on Wednesday.

While the El-Nino weather pattern poses a threat to the monsoons, cooling of demand from China is leading to global disinflation and some of the negative news on the inflation front should get “somewhat balanced,” she said. BLOOMBERG