Rate risk: RBI can end up with a dal-rice problem on its plate

Rice and dal can turn into a disappointing combo for the Reserve Bank of India (RBI). Even as the RBI rate-setting panel had kept the benchmark lending rate at 6.5 per cent in June for the second consecutive time after a cumulative hike of 250 basis points since May last year as inflation slid down to 4.25 per cent in May from a peak of 7.8 per cent in April last year. One basis point is one hundredth of a percent.

Now various factors are gathering to produce conditions that can hike food prices, thus keeping the RBI’s hand on the pause button for longer than expected.

Sowing has shrunk
The late arrival of monsoon in states which account for 61% of rice-sowing area has led to a decline in area under cultivation by more than a third until June 25, ET has reported. Coupled with increasing global prices of rice, this may end up pushing up inflation. Although the area under pulses has increased, tur sowing has declined. Tur dal prices have already been soaring, and the government had to put stock limits on it.

Rice accounts for 4.4% of the Consumer Price Index (CPI) basket, whereas tur dal, or arhar, has a 0.8% weight in retail inflation. Their combined share in food inflation is 13.2%. Food items have 39.06% weight in the CPI, the price gauge for the RBI. A deficient monsoon could push food inflation by 50-60 basis points, say economists.

India’s retail inflation eased to a more-than-two-year low of 4.25 per cent in May. The Consumer Food Price Index eased to 2.91 per cent in May from 3.84 per cent in April. However, cereal inflation remained in double digits at 12.65 per cent, though down from 13.67 per cent in April. “There is definitely going to be an upside on the food inflation side, that is, on the primary articles. I am worried about pulses in particular. Inflation has already started increasing out there,” Madan Sabnavis, chief economist at Bank of Baroda, had told ET recently.

While rice sowing can still pick up, there is also a concern that many farmers may end up replacing rice with coarse cereals, economists have told ET.

How much is the rain shortfall?
A recent SBI Research note has pointed to deficient rainfall conditions till June 26. “The current status of shortfall (-23% below normal as compared to –7% last year, though improving sharply) and delayed arrival imparts a coefficient of fear on inflation and growth estimates as spatial patterns and distribution of rainfall assume utmost significance,” it warned.

Uneven rains, even if the monsoon is normal overall, will also hike food inflation. “For the record, uneven spatial distribution in select states within an ‘overall normal’ monsoon in 2022 (6% above LPA) saw CPI food inflation increasing to 6.7% from 4.2% of preceding year,” the SBI Research note said.

The “SBI Monsoon Impact Index / MI” incorporates four parameters from 15 major food grains producing states, viz. their share intotal food grains production, rainfall deviation from normal, irrigation status, and overall skewness in rainfall among states. On ascale of 0-100, values closer to 100 indicate lesser impact while values with increased distance from 100 indicate rising impact ofspatial distribution of rainfall on economy.

However, the current SBI Monsoon Impact Index, with the present value of 64.0, fares better than the 2022 full season MI Index at 60.2. “It strengthens our belief that better prospects of monsoon from this point should transgress MI Index towards 90, where the negative impact on economy would be virtually nil,” the note says.

“Interestingly, even though on an overall basis rainfall is deficient, the cereal producing states have received plenty of rainfall in FY23 unlike in FY22 when it was deficient,” the note adds.

The RBI’s rain watch
For its rate decisions, the RBI is watching the rains. Besides the late arrival of monsoon and uneven rains, another threat on the rain front is the El Niño effect.

Likelihood of a surge in farm product prices in the second half of the year could delay the cycle of rate-easing, minutes of the early-June review of the central bank’s Monetary Policy Committee (MPC) have shown. Although headline inflation declined in May to 4.25%, the lowest print for the price gauge in 25 months, concerns persisted on sustainability of the trend due to the El Niño effect, which may cause erratic rainfall and a spike in farm-gate prices.

The central bank has projected the CPI inflation at 5.1% for FY24, higher than the 4% target it chases. This projection was made assuming a normal monsoon distribution, while the rainy season started off with a deficit.

“The spatial and temporal distribution of the south-west monsoon in the backdrop of a likely El Niño weather pattern needs to be watched carefully, especially for its impact on food prices,” said RBI Governor Shaktikanta Das in the MPC meeting. “International prices of key food items, such as rice and sugar, are at elevated levels. Adverse climate events have the potential to quickly change the direction of the inflation trajectory.”
This article has been republished from The Economic Times