Will India’s Rainfall-Inflation Dynamics Be an Interesting Googly for RBI’s MPC?

Five states saw a significant pick-up in food inflation and general retail inflation in September. Excess rainfall in October will continue to push prices higher.

The rain gods have been kind to India’s farmers, showering normal and well-distributed rainfall during the supposed “monsoon period” of June to September.

However, the erratic rainfall continuing until almost the first week of November has been an aberration and led to significant damage to kharif crops. The market arrivals of seven out 11 key kharif crops have recorded a decline in arrivals by more than 30% (year-on-year).

Keeping the shortages in the backdrop, there could plausibly be an after-effect on retail and wholesale inflation. On the other hand, the leading indicators continue to be lacklustre, led by core sector numbers which have contracted to their nadir since the commencement of the new index.

The rising retail inflation, albeit remaining within Reserve Bank of India’s inflation target band of (4% +/- 2%) coupled with lingering domestic growth concerns, provides divergent scenarios posing a challenge to the monetary policy committee (MPC) members to address.

Pick-up in retail inflation

Since August 2018, retail inflation has been one of the few bright macroeconomic variables amidst a host of debilitated indicators. The chief reason for this has been deflationary pressures or low inflation in the food basket, which has the highest weightage (45.9%) in retail inflation.

The deflation in food components, especially vegetables and pulses, can be validated by the table below (highlighted in green).

However, what is of importance is the significant pick-up in food inflation during August 2019 and September 2019, driven especially by prices of pulses and vegetables (highlighted in red). Also, as retail inflation was benign during the last quarter of 2018, this low statistical base effect will also weigh on retail inflation during the last quarter of 2019.

                                                                           Table 1: Consumer price inflation (y-o-y%)

Also, data sourced from Department of Consumer Affairs on retail prices of essential commodities shows that the trend of rising prices has continued with significant rise in prices of dal (moong, urad and tur) along with vegetable prices namely onion and tomato. 

Also read: Farmers, Experts Explain Why ‘Fear’ over Onion Prices Is Unfounded

Though this is evidenced in the chart below, you, as a consumer must have also felt the pinch in the grocery market. 

                                                  Chart 1: Average retail prices of essential commodities during September and October

Impact of excess rainfall

The cumulative percentage deviation in actual rainfall from normal years during this monsoon season (June-September) has been almost 10%, which as per the IMD depicts normal rainfall. The erratic rainfall in October affected the harvesting of kharif crops, which in turn will have a bearing on retail food inflation. 

The table below shows the metrological sub-divisions and the deviation in rainfall from normal. It is important to note that, as per IMD, all these regions fall under the definition of “excess rainfall”. 

This deviation from normal rainfall has been juxtaposed with state level retail inflation (general) and retail inflation (food) (Table 3a and Table 3b).

                                                    Table 2: Rainfall deviation from normal in key metrological sub-divisions (%)

These five states – Karnataka, Maharashtra, Rajasthan, Gujarat and Madhya Pradesh – saw a significant pick-up in food inflation and general retail inflation in September. The excess rainfall in October will continue to push prices higher in these states. 

                                                   Table 3a: State-wise retail inflation (general y-o-y%)


                                                      Table 3b: State-wise inflation in food components (y-o-y%)

Lead growth  indicators disappoint

Three key lead indicators (namely core sector, PMI-manufacturing and bank credit growth), recently released, continue to highlight the persisting domestic economy concerns. 

Seven out of the eight core sector industries are flashing red with y-o-y growth in coal production touching a low of (-)21%. PMI-manufacturing, though showing expansion, has declined to a 2-year low. Incremental credit growth (April 1-October 11, 2019) continues to be flat at 0.2%.

 Sectoral credit data shows that incremental credit to both industries and services have contracted. The three services (shown in the Table 4), accounting for more than 50% of credit to services sector has registered significant decline. Incremental credit to large industries has also recorded negative growth of (-)4%.

The MPC has projected inflation to remain below target (not even exceeding 4%) until Q1-FY2021. It had continued to emphasise the need to restore growth momentum by reinvigorating domestic demand. In addition, the accommodative stance was harped upon as long as it is necessary to revive growth. 

However, this diverging rainfall-inflation dynamics and continuing growth concerns would be a tough nut for the MPC members to crack. The GDP number for Q2 and core sector for October (to be released at the end of this month) would be the key information for the MPC to decide on its stance.  

Sushant Hede is Associate Economist CARE Ratings. Views expressed are personal