Easing global food prices and promise of good monsoon give RBI elbow room ahead of MPC meeting

FAO Food Price Index

The decline in the benchmark gauge for international food prices comes despite the ‘cereal’ and ‘meat’ sub-indices within the overall FAO index scaling new highs of 173.4 points and 122 points respectively in May. But this has been offset by a significant dip in the ‘vegetable oils’ sub-index (from a peak of 251.8 points in March to 237.5 in April and 229.3 in May) and also those of ‘dairy’ (from 146.7 points in April to 141.6 in May) and ‘sugar’ (121.5 in April to 120.3 points in May).

The FAO data clearly suggest that global prices have fallen off their March/early-April peaks in the case of vegetable oils and dairy products. The most-active crude palm oil futures contract closed at 6,468 ringgit per tonne in the Bursa Malaysia derivatives exchange on Thursday, after trading at a lifetime high of 7,268 on March 9.

Prices of skim milk powder have likewise come down from $4,599 to $4,116 per tonne at the Global Dairy Trade fortnightly auctions between April 5 and May 17, while dipping even more, from $7,111 per tonne on March 15 to $6,043 on May 17, for anhydrous milk fat (ghee).

Falling global prices translate into lower domestic inflation, especially for commodities that are substantially imported (vegetable oils).

They have a similar impact on commodities whose domestic prices are linked to export parity levels.

The collapse of powder and fat prices, first in the international and then domestic market, have already led Maharashtra dairies to slash procurement rates of cow milk from Rs 35-36 to Rs 32-33 per litre since the first week of May. Prices could reduce further once fodder availability goes up with the arrival of the monsoon.

The food inflation situation in India has also improved due to supply-side management measures by the Centre. That includes banning exports of wheat (thereby de-linking domestic realisations from soaring international prices) and allowing import of up to 2 million tonnes each of crude soyabean and sunflower at nil duty (to partially counter the effect of Indonesia’s restrictions on palm oil shipments).

Even in cereals, where the FAO attributed the all-time-high price index in May to India’s wheat export ban decision, international prices are likely to ease with the harvesting of the Russian crop. Russia is expected to export 39 million tonnes (mt) out of a total production of 85 mt in the new 2022-23 season (July-June), as against corresponding figures of 32-32.5 mt and 76 mt in 2021-22.

One indicator of improved supplies in the days ahead is wheat prices at the Chicago Board of Trade: These are now at $10.5-10.6 per bushel, after crossing $12.8 levels on May 17 following the Indian export ban.

But it is not only world prices, where the FAO index soared from a low of 91.1 points in May 2020 (at the height of the Covid-19 lockdowns around the world) to the record 159.7 points in March 2022 (after the Russian invasion of Ukraine) — there is also hope from the prediction of a ‘normal’ monsoon. On May 31, the IMD predicted aggregate rainfall for the country during the four-month southwest monsoon season (June-September) at 103 per cent of the historical long period average (LPA). The IMD had predicted rainfall at 99 per cent of the LPA in its first forecast on April 14.

On both counts – easing global food prices and the prospect of a good monsoon – the MPC members can perhaps afford to breathe somewhat easier than in the May 2-4 “off-cycle” meeting that resulted in drastic interest rate hikes and monetary tightening actions.