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Ahead of RBI’s MPC meeting, why there is cause for cautious optimism on food inflation

Timely onset of winter, and improved fertiliser availability have boosted rabi plantings. Most open market agri prices are high. All are pointers that the RBI MPC meeting from December 5 should take note of.

Sowing is in progress for the rabi (winter-spring) crop. The extended monsoon has helped recharge aquifers and fill up reservoirs. Coupled with the timely onset of winter and improved fertiliser availability, it has given a boost to rabi plantings of wheat, mustard, maize, and even chana and masoor. (Express photo)

Consumer price inflation fell from 7.41% year-on-year in September to 6.77% in October — and food inflation fell even more, from 8.60% to 7.01%.

But that isn’t the only data point the Reserve Bank of India’s monetary policy committee (MPC) may consider at its next interest-rate action meeting from December 5-7. How much to hike, if at all, would depend on how it perceives inflation — especially food, which has a 45.86% weight in the consumer price index — to pan out in the coming months.

There are two reasons for cautious optimism here.

The first relates to global food prices.

The accompanying chart shows movements in the UN Food and Agriculture Organization’s (FAO’s) Food Price Index (FPI) over the last two-and-a-half years.

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The index — a weighted average of the international prices of a basket of food commodities over a base period value, taken at 100 for 2014-16 — soared from a low of 91.1 points in May 2020 (when Covid lockdowns worldwide triggered a “collapse of demand”) to an all-time high of 159.7 points in March 2022 (following Russia’s invasion of Ukraine, leading to disruptions and “collapse of supply”).

Both the FPI and its two key component indices — cereals and vegetable oils, which had exhibited ever higher volatility — have come down from those peaks. The FPI has fallen every single month since March, to 135.7 points in November. More significant are vegetable oils. At 154.7 points last month, the index was 16.2% down from a year ago and 38.6% from the March 2022 high.

The effects of world prices easing are being felt most clearly in edible oils. Over the last six months, the all-India average modal (most-quoted) retail prices of soyabean and palm oil have come down from Rs 180 to Rs 160 and from Rs 165 to Rs 110 per kg respectively. Not surprising, given that India imports roughly 60% of its edible oil requirements.

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The second reason has to do with domestic factors.

This year’s kharif crop, mainly sown in June-July and harvested after October, hasn’t been too good. The southwest monsoon’s late arrival affecting June plantings, drought-like conditions in the four Ganga basin states (Uttar Pradesh, Bihar, Jharkhand, and West Bengal) and excess September-October rainfall around harvesting time has resulted in lower output for most crops. Cotton and soyabean were the probable exceptions: High prices and their relative hardiness over, say pulses, induced farmers to expand acreages under both.

This is in contrast to kharif pulses. Production of both arhar/tur (pigeon-pea) and urad (black gram) are estimated 15-20% lower than in the 2021 kharif season. It explains why arhar is currently wholesaling at about Rs 7,000/quintal in markets such as Gulbarga (Karnataka) and Latur (Maharashtra), against last year’s Rs 6,000 levels at this time.

Yet pulses overall haven’t seen much inflation so far. That is primarily due to the huge stocks of chana (chickpea) with government agencies; they had bought some 25 lakh tonnes (lt) during the last rabi marketing season (March-April), on top of the 8 lt held from the previous crop.

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There’s still an estimated 24 lt of unsold stocks, which is putting pressure on prices: Chana is trading in major mandis like Rajkot (Gujarat), Akola (Maharashtra) and Ganjbasoda (Madhya Pradesh) at Rs 4,400-4,600 per quintal, well below the official minimum support price (MSP) of Rs 5,335.

Chana stocks apart, the market is being well-supplied by imports of masoor (red lentil) from Canada and Australia at landed prices of $720-730 per tonne (Rs 59-60/kg). Since masoor dal can replace arhar to some extent — more so in hotels and canteens — it is putting a lid on the latter’s prices.

There is room for optimism in rabi.

Sowing is in progress for the rabi (winter-spring) crop. The extended monsoon, although bad for the harvest-ready kharif crops, has helped recharge aquifers and fill up reservoirs. Coupled with the timely onset of winter and improved fertiliser availability (on the back of easing global prices), it has given a boost to rabi plantings of wheat, mustard, maize, and even chana and masoor (see table).

Open market prices of all these crops, save chana, are ruling above MSPs. That, and the need to make up for kharif losses, has been added incentive for farmers to sow more area this time.

It isn’t field crops alone. Onion prices at Maharashtra’s Lasalgaon market, at Rs 10 per kg, are half of their year-ago levels. Last year’s excess rain from September extending through January, destroyed both the kharif (June-July sown and October-November harvested) and late-kharif (September-October sown and January-harvested) onions.

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There has been no such damage from La Niña this time, even as farmers have started planting the all-important rabi onion that is harvested from March onwards and is amenable to storage.

There isn’t any major cause for concern with potatoes either — prices in Agra, at Rs 15/kg, are higher than last year’s Rs 10 levels. Heavy October rainfall did delay plantings by 10-15 days with some area reduction, but the prospects for the tuber (harvested towards March and mainly kept in cold stores) look good for now. Most crops — seasonal vegetables included — have seemingly escaped the ravages of a third La Niña year in a row.

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The weakening rainfall activity since November should also be good for milk. Waterlogged fields from incessant rains do not allow fodder to grow and come out for animals to graze. Farmers have been suffering fodder shortages and increased feed costs, forcing dairies in turn to pay more for milk and pass it on to consumers.

That should ease somewhat with bumper crops of soyabean, groundnut, cotton, and mustard (their oil-cakes are protein ingredients in cattle and poultry feed) and also maize (a source of energy).

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But it’s important to beware the Ides of March.

The above optimism should be tempered by a simple fact: The present soil moisture and temperature conditions are ideal for the rabi crop, whose harvesting and mandi arrivals though is only after March.

Last year’s wheat was singed by a sudden spike in temperatures from mid-March, when the crop had just entered the grain-filling stage. March 2015 saw unseasonal rainfall, accompanied by hailstorms and gusty winds, causing widespread crop devastation across north, west and central India.

A lot can happen between now and March-April. The India Meteorological Department, on December 1, forecast “above normal maximum temperatures” during the winter season (December-February) “over most parts of northwest India, east & northeast India and many parts of central India”. That isn’t a happy augury either for wheat or mustard.

First published on: 04-12-2022 at 19:51 IST
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