FinMin expects food inflation relief soon, thanks to bumper kharif harvest

There could be some good news on the food inflation front in November as the estimate of bumper kharif production is likely to lower food inflation in the upcoming months, according to the Ministry of Finance. The FinMin's monthly economic review report says going ahead, the inflation trajectory will largely be influenced by the price movements in edible oils, tomatoes, onions and potatoes.

On the positive side, the early trend visible in vegetable prices in November so far signals "significantly lower inflation" in tomatoes and onions. "Favourable monsoon, adequate reservoir levels and higher minimum support prices are likely to boost rabi sowing and production," says the ministry.

India's retail inflation in October 2024 worryingly soared to a 14-month high of 6.2% in October 2024, breaching the upper limit of the MPC's medium-term target range of 2-6%. The sequential hardening in inflation was largely led by the food and beverages segment, followed by a mild uptick in the core items. The retail inflation hit a 9-month high of 5.49% in September 2024, a huge spike from 3.65% in August, 3.60% in July and 5.08% in June.

The finance ministry says India's economic outlook for the coming months is "cautiously optimistic", with agriculture likely to benefit from favourable monsoon conditions, increased minimum support prices and adequate supply of inputs. It says bright agricultural production prospects make the inflation outlook benign, despite existing price pressures in select food items. "Early November trends signalled moderation in key food prices, though geopolitical factors may continue to impact domestic inflation and supply chains."

In October, says the ministry, Amid a clouded global background, and after a brief period of softening momentum over the monsoon months, many high-frequency indicators of economic activity in India have shown a rebound. These include indicators of rural and urban demand and supply side variables like purchasing managers’ index and e-way bill generation. On the employment front, says the ministry, the formal workforce is expanding, with notable increases in manufacturing jobs and a strong inflow of youth into organised sectors.

On the external front, it says, India's export recovery may encounter challenges due to softening demand in developed markets. "However, trade in the services sector is sustaining momentum." Apart from the emerging indications of domestic growth and stability, the dynamics of global interest rates, earning growth and valuation, geopolitical developments and policy decisions of the next administration in the United States will also determine the course of trade and capital flows.

Last week, the Reserve Bank of India (RBI), in its monthly economic bulletin, said the October CPI inflation reading turned out to be a "sticker shock" after the wake-up call of September’s spike, reinforcing the RBI’s warnings on complacency due to sub-target outcomes for July and August.

"What is worrying is that apart from the sharp surge in the momentum of food prices, core inflation has edged up," the RBI economists wrote.

The RBI economists find that there are early signs of second-order effects or spillovers of high primary food prices -- following the surge in prices of edible oils, inflation in respect of processed food prices is starting to see an uptick.