Will easing farm commodity prices provide room to RBI to pause rate hikes?

While the govt has introduced windfall tax and export curbs to arrest runaway prices, a lot depends on how the monsoon pans out this season

After attaining record highs a few months back, prices of most food items, including edible oils, wheat, rice, cotton and even critical inputs like fertilisers have started coming down both domestically and internationally due to strong inflation control measures and some slowdown in demand.

But whether or not the indications will be good enough to prompt the Reserve Bank of India (RBI) to pause or recalibrate its interest rate hiking cycle is something only time will tell.

Rate hikes

The Monetary Policy Committee (MPC) raised the repo rate by 40 bps in an off-cycle move in May in order to tame inflation.

Then, in its policy review in June, it raised the rate by another 50 bps to 4.9 per cent.

MPC feared that inflation would remain over the mandated upper tolerance limit for the first three quarters of 2022-23.

MPC normally looks at core inflation, which does not include food and fuel. But in these extraordinary times it even keenly watching movements in food and fuel prices. 

In its last policy review, MPC said supply side measures taken by the government would help alleviate some cost-push measures.

However, it noted that continuing shocks to food inflation could sustain pressures on headline inflation.

Persistent inflationary pressures could set in motion the second round effects on headline CPI, it said.

After the review, the government took other measures such as windfall tax and export to cool down inflation.

Amid all of this, the performance of the southwest monsoon from here onwards will also be significant.

The monsoons which are often seen as an invisible factor in India’s economic growth and should never be ignored, have had a patchy start this season.

The rains, after remaining weak for most of June, have staged a smart recovery in July, wiping off much of the deficit and prompting a strong pullback in kharif sowing.

Good rains will ensure a strong kharif harvest, which will further ease supply side woes, particularly of oilseeds, cotton, pulses and cereals, and step up efforts to combat inflation.

Shravan Shetty, Managing Director at Primus Partners, said that with normal rainfall and correction in agriculture commodity prices  food inflation is expected to moderate. 

This coupled with drop in crude prices we expect inflation to moderate since food and fuel together constitute almost 60 per cent  of the CPI basket.  

"While the transmission to the end customer  might take a few weeks expect RBI to take cognizance and adjust stance accordingly. The risk currently is primarily due to the depreciating currency offsetting the price reduction and hence RBI and government focus is shifting towards currency stabilization," Shetty said.

“Oil and oilseed prices have fallen on account of higher palm oil supplies from Indonesia, after that country lifted the export ban. Improved sunflower oil supply from Ukraine has weighed on the sentiment of oil and seed markets, while the export ban managed to turn the wheat prices sideways. However, a lower crop will limit the downside,” said Tarun Satsangi, AGM-Research, Origo e-Mandi.
 

Global downturn

According to a Bloomberg Report, worries over surging global food costs are easing as prices of everything from cooking oils to wheat and corn have tumbled to the lowest levels in months on increasing physical supplies and reduced bets by investors on futures markets.

Palm oil, the world’s most consumed cooking medium, has plunged more than 45 per cent from its record close in April to the weakest level in a year. Whole wheat has slumped over 35 per cent from an all-time high in March, and corn has dropped about 30 per cent from its peak for the year.

Russia’s invasion of Ukraine in February choked supplies of grains and sunflower oil from the Black Sea, worsening existing shortages caused by extreme weather and supply-chain chaos.

This sparked fears of a global food crisis, which would hit consumers in poorer nations particularly hard.

Prices are now back to levels before the invasion, Bloomberg said.

Edible oil and oilseeds

Prices of major edible oils have slumped in the global markets since June, pulling down domestic markets in the process, as India imports almost 60 per cent of its annual palm oil consumption largely from Indonesia and Malaysia and a similar quantity of soybean oil from Argentina and Brazil.

Data shows that between June 1 and July 1, the landed price of crude palm oil (the largest consumed edible oil in India) has dropped by almost 24 per cent, while that of soybean and sunflower oil dropped by 17.4 per cent and 12.2 per cent, respectively.

Going forward too, there is hope that edible oil will remain subdued due to the drop in global demand and good sowing of the domestic kharif crop of soybean and groundnut.

A few days back, soybean prices in Indore (the benchmark market) recovered from a four-month low to trade at about Rs 6,500 per quintal.

But trade sources said the relief could be shortlived as scrapping of import duty on crude soybean oil and sunflower oil, expectations of higher CPO and Palm Olein supply from Indonesia and Malaysia, lower soybean and mustard demand from millers and stockists, and improved imports of sunflower oil will support any downside in the soybean prices.

Cotton

It is another commodity that has seen a big drop in prices. Cotton prices in the domestic markets had surged to an all-time high of Rs 50,330 a bale in early May 2022 while international rates were at an 11.5-year high of 155.95 cents per pound in the International Cotton Exchange.

Since then, prices have dropped sharply in India and are currently trading at Rs 40,000-42,000 per bale with strong expectations that they will fall below Rs 30,000 a bale by 2022-end and in the international markets to 80 cents per pound.

“If we look at the current scenario, the ‘bull-run’ in cotton prices seems to have ended, both in the domestic and international markets. Cotton prices will fall below Rs 30,000 a bale by the end of 2022. Demand erosion, firm US dollar outlook, global recessionary fears, and better crop outlook are the factors suggesting lower prices in the coming weeks to months,” said Satsangi of Origo e-Mandi. 

Trade sources said in the 2021-22 crop year, some 3.7-3.8 million bales of cotton were exported till May 2022, against 5.8 million bales a year ago.

Higher prices have made export economically unviable.

This year, India’s cotton export may limit to 4.0-4.2 million bales versus 7.5 million bales of cotton exports in 2020-21, Satsangi said.

The area under cotton in this kharif season is also expected to rise by 4-6 per cent to 12.5 million hectares. as cotton prices have given better realization in the past two years, and the recent sharp fall in soybean prices will encourage farmers to opt for cotton this year.

Wheat, rice and other cereals

Prices of major domestic cereals such as wheat, rice and maize too have fallen from their multi-year highs of April and May due to a series of measures and weakness in global markets. But they are still higher than last year.

Data shows wheat has been trading at Rs 2,000-2,300 per quintal for almost a month now in domestic wholesale market, down from a high of over Rs 2,500 per quintal seen in April and May.

Going forward, trade sources said Delhi wheat would trade firm at Rs 2,300-2,350 a quintal but a big downside seems limited.

“Lower wheat production due to the heatwave impact, lower government stocks and slow procurement pace, less allocation for PDS and limited open market sales could support wheat prices in the months ahead,” Origo Commodities said in a research report.

In the case of maize, Origo said prices would trade sideways to firm in the Rs 2,270-2,300 a quintal band in the very short term, while rice would trade firm at Rs 8,400-8,700 per quintal.

Urea and other fertilisers

The landed price of imported urea softened by almost 27 per cent in May 2022 from the peak in December 2021. However, the rates are still considerably higher than the same period last year (by almost 95.4 per cent).

About 30 per cent of India's annual urea consumption is imported. Imported prices of DAP remained high in May. Nearly half of India's consumption is imported.

In case of key raw materials, data shows that ammonia prices in May dropped from the April levels, while others remained range bound.