Continued vigil on inflation needed given erratic monsoon progress: SBI Research

New Delhi [India], July 13 : Even though India’s retail inflation in June jumped considerably, it continues to remain within the RBI’s tolerance range (2-6 per cent) for the fourth consecutive month, with forecasts that it would remain so for the rest of the financial year 2023-24.
SBI Research, in its latest 'Ecowrap' report, noted that a continued vigil on the evolving inflation outlook is warranted given the erratic progress of monsoon and its impact on Kharif crop sowing, and subsequently on overall food inflation. 
Meanwhile, farmers in India have started sowing their Kharif crops. Paddy, moong, bajra, maize, groundnut, soybean, and cotton are some of the major Kharif crops.
India has three cropping seasons -- summer, kharif, and rabi. Crops sown during June-July and harvested in October-November are kharif. Crops that are sown during October-November and the produce harvested from January-March depending on maturity is Rabi. Crops produced after rabi but ahead of kharif are summer crops.
Bucking the trend, retail inflation in India rose considerably in June to 4.81 per cent, largely due to a sharp spurt in vegetable prices. The inflation index for rural and urban was 4.72 per cent and 4.96 per cent, respectively. Back in May, the retail inflation (final) was at 4.31 per cent, hitting a two-year low. It was at 4.7 per cent in April and 5.7 per cent the previous month.
According to the Ministry of Statistics and Programme Implementation data released Wednesday, the provisional index number for vegetables rose from 161.0 in May to 180.6 in June. Vegetables have a 6 per cent weightage on the overall retail inflation. Besides vegetables, meat and fish; eggs; pulses and products; spices indices too saw an uptick.
The rise in inflation could partly be attributed to the current spurt in tomato prices across India. The rise in tomato prices is reported across the country, and not just limited to a particular region or geography. In key cities, it rose to as high as Rs 150-160 per kg.
Amid a sharp spurt in tomato prices across the country, the central government on Wednesday directed its agencies – NAFED and NCCF -- to immediately procure the staple vegetable from mandis in key growing states of Andhra Pradesh, Karnataka, and Maharashtra.
SBI Research report, authored by SBI’s Group Chief Economic Adviser Soumya Kanti Ghosh, analysed volatility in vegetable prices, Tomato, Onion and Potato (TOP) --  which form the staples in Indian kitchen and found their price variation is the “chief cause of volatility in the vegetable/food inflation”.
“Price change of tomatoes has seasonality in production and induces irregular shocks. As about 70 per cent of the tomato production takes place during the rabi season (Oct/Nov till Mar/Apr) and Kharif production during July-November usually contributes less than 30 per cent of the total tomato production in a year, this variation in supply puts upward pressure on tomato prices every year during July-November, with pressure maximum in July,” the report said.
Tomatoes have a relatively lower shelf life.
SBI Research analsysis found that the past 10 years’ data revealed that tomato price increase alone did not influence the overall retail inflation much, but it did only when the tomato price increase was accompanied by substantial increase in price of potato and onion.
Assuming tomato prices increase without any substantial change in potato and onion, SBI Research said it sees average inflation in (July-September) Q2 FY24 will come near 5.8 per cent on a yearly basis.
But if the Tomato Onion Potato inflation increases, then the retail inflation according to the report might come around 6.0 per cent (which is the upper tolerance level for RBI). Accordingly, average retail inflation for entire financial year 2023-24 will vary between 5.2-5.4 per cent.
On positive cues, core retail inflation (core inflation is the change in the costs of goods and services, barring those from the food and energy basket) though declined marginally to 5.12 per cent in June from 5.21 per cent in May, and remains below the one-year average of 5.8 per cent.
Broadly, retail inflation (Consumer Price Index) in India peaked at 7.8 per cent in April 2022. In some advanced countries, inflation had in fact touched a multi-decade high and even breached the 10 per cent mark.
RBI's consistent monetary policy tightening since mid-2022 could be attributed to the substantial decline in inflation numbers in India.
India's retail inflation was above RBI's 6 per cent target for three consecutive quarters and had managed to fall back to the RBI's comfort zone only in November 2022.
Under the flexible inflation targeting framework, the RBI is deemed to have failed in managing price rises if the CPI-based inflation is outside the 2-6 per cent range for three quarters in a row.
Barring the recent pauses, the RBI has raised the repo rate by 250 basis points cumulatively since May 2022 in the fight against inflation.
Raising interest rates is a monetary policy instrument that typically helps suppress demand in the economy, thereby helping the inflation rate decline.