Despite concerns about rising global inflation, India’s inflation rate is likely to remain range-bound to moderate in coming months as domestic food prices are likely to come down, economists said.
However, the inflation level may remain above an optimal comfort level of around 4%. The Reserve Bank of India had recently revised its projection for Consumer Price Inflation to %%-5.2% for FY22 against a previous projection of 4.6%-5.2%.
Even though the Food and Agriculture Organization’s (FAO) food price index rose for the eighth straight month in January, economists said Indian prices won’t be impacted so much except for a few items in which there are relatively higher levels of imports.
“There is a huge weightage of food in the Indian inflation index. We expect inflation in 2020-21 to rise in other countries, but in India it will go down.,” said Sujan Hajra, chief economist at Anand Rathi Securities.
“We expect Indian inflation to range between 4%-5% over the next 12 to 18 months.”
He explained that India’s food inflation is mainly influenced by four categories — animal products, fruits and vegetables, edible oils and pulses.
Prices of animal products started increasing during the period of lockdown that began in late-March as inventory levels had fallen. Since then, the inventory levels have picked up. moderating the prices.
For edible oils, the minimum support prices had seen a sharp increase of up to 40% in the minimum support prices (MSP) that were offered in 2019. Consequently, prices went up, but since then the level of MSP that was offered has been relatively modest and therefore prices won’t rise so much.
Similarly, there was a sharp supply shock in pulses which had driven up prices last year, but since then a combination of higher imports and domestic crop supplies are likely to cool down prices. The only category which may continue to see price volatility are fruits and vegetables due to multiple factors governing them, Hajra said.
However, non-food inflation driven by fuel and personal care products may rise in coming months.
Food inflation seen rangebound
Sunil Sinha, principal economist at India Ratings, said that winter months typically tend to lower food prices because of higher output of fruits, vegetables and other seasonal agricultural produce.
“So to that extent, food inflation will remain range bound. Also at least north India has been impacted by the bird flu, which has impacted sales of poultry products,” he added.
“Then we have had a good kharif harvest (summer) and the indications are that we will have another bumper rabi ( winter) harvest. So if you look at the net impact, there will hardly be any pressure from food prices on headline inflation,” he added.
However, Madan Sabnavis. chief economist at CARE Ratings,, said that inflation may continue to hover in the range of 5%- 5.5 % in FY 21.
“We are seeing a shift from food inflation to core inflation. That is assuming a normal monsoon,” he said.
Crude oil prices are likely to climb towards the $65/barrel level by the end of the year. “Prices of household goods have also gone up. Manufacturers are also increasing prices in order to stay afloat,” he added.
Sabnavis said that an economic recovery is likely to drive up prices of products in the wake of unusually low demand seen in the wake of the pandemic.