Monsoon woes: Is India staring at higher food price-led inflation?

However, if monsoon progress in August and is geographically more even, Nomura believes Kharif sowing could still pick up going ahead, which in turn could keep food prices and inflation under check.

India may be staring at higher food price-led inflation if the monsoon activity does not pick up pace and the spatial distribution of the rains does not improve soon, suggests a report from Nomura.

As July – the key month for Kharif or summer sowing – comes to a close, monsoons, Nomura said, are currently tracking at 11 per cent above normal. However, rains have been geographically uneven: concentrated in the central and South India, trailing in the Northwest and a steep 15 per cent below-normal in the East and the Northeast.

If monsoon rains progress in August and are geographically more even, Nomura believes Kharif sowing could still pick up going ahead, which in turn could keep food prices under check and keep a lid on inflation.

"It may be a little too early to raise an alarm. However, if this uneven distribution of rainfall continues, then a potential cut in foodgrain production, especially rice, would be a downside risk to agriculture gross value added (GVA) growth and an upside risk to food inflation," cautioned Sonal Varma, chief economist for India and Asia ex-Japan at Nomura in a recent co-authored note with Aurodeep Nandi.

Kharif sowing 2022

 

According to the report, acreage for rice, grown predominantly in the rain deficient areas, is down around 17 per cent year-on-year (y-o-y). Pulses are overall higher, but tur sowing is down nearly 20 per cent y-o-y, while moong is sharply higher. Also, sowing of coarse cereals, oilseeds and cotton have risen. "Overall, food grain acreage is tracking at 4.6 per cent lower y-o-y, as of mid-July," Nomura said.

“Area sown for rice has been trailing last year’s comparable levels by a fair margin. Moreover, wheat stocks, according to reports, have depleted close to buffer norms. On the other hand, the government has a commitment for foodgrain distribution under the Pradhan Mantri Garib Kalyan Anna Yojana till September 2022. If the Kharif rice production does see a downside, it could very well put upward pressure on prices, of both rice and wheat. This can fan food price-led inflation going ahead, but to a large extent the outlook remains dependent on rainfall over the remaining part of the season along with lagged pickup in rice sowing,” said Yuvika Singhal, an economist with QuantEco Research.

Meanwhile, June consumer price index (CPI) inflation in India came in at 7.01 per cent from 7.04 per cent recorded in May. June marked the sixth consecutive month that CPI inflation was above the upper bound of the RBI’s target range of 2-6 per cent. Given this backdrop, analysts expect the Reserve Bank of India (RBI) to continue on its rate hike path, at least for the next few months.

“We maintain our average FY2023 CPI inflation estimate at 6.5 per cent, with the moderation below 6 per cent not likely until Q4-FY23. As the rupee continues to be weighed down by still elevated commodity prices and aggressive global monetary tightening, the need for frontloaded policy action remains in place. We maintain our call for 85 bps of further repo rate hikes by end-Q3-FY23 (including 35-50 bps in the August policy), and we expect the MPC to pause in its February 2023 meeting to assess the growth-inflation dynamics as inflation moderates below 6 per cent,” wrote Upasna Bhardwaj, chief economist at Kotak Mahindra Bank in a recent note with Anuragh Balajee.