Tomato woes: MPC pegs inflation at over 6 per cent in current quarter

Inflation unlikely to fall to 4% target even in Q1 FY25; GDP growth projections kept intact

Economic growth, GDP

Indivjal Dhasmana New Delhi

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The Monetary Policy Committee (MPC) of the Reserve Bank of India (RBI) has raised its projection for retail price inflation beyond its comfort zone of 6 per cent for this quarter of the current financial year.

A spike in vegetable prices, led by tomato, is the reason for the MPC increasing its projection by a full 100 basis points to 6.2 per cent for the second quarter. In the previous policy meeting in June, it had pegged inflation at 5.2 per cent.

The MPC, however, expected a correction in vegetable prices, given the significant improvement in the monsoon’s progress and of kharif sowing in July. It, however, cautioned that the impact of the uneven distribution of rainfall called for careful monitoring.  

Kharif sowing had covered 91.5 million hectares as on August 4 this year, slightly higher than 91.2 million hectares in the corresponding period last financial year. However, pulses were sown in 10.7 million hectares against 11.8 million hectares over this period, with areas under arhar, urad and moong cultivation declining.

The MPC has pegged the inflation rate to be higher for the third quarter of FY24 as well: at 5.7 per cent against its previous projection of 5.4 per cent.  The projection for the fourth quarter remains the same, 5.2 per cent.

All this would lead to average inflation rising to 5.4 per cent for FY24 from 5.1 per cent projected in the June review and 5.2 per cent in the April policy.

The MPC has pegged the inflation rate at 5.2 per cent for the first quarter of 2024-25. This means the panel does not expect the rate of price rise to fall to its target level of 4 per cent even then.

It is widely believed that the consumer price index (CPI)-based inflation rate will cross 6 per cent in July against 4.81 per cent in June, once the full impact of tomato and other vegetable prices is captured.

The rate of price rise stood at 4.6 per cent in the first quarter, as projected by the MPC in June, but was lower than the April forecast of 5.1 per cent.

The MPC expected the hardening of oil prices because of production cuts to also contribute to higher inflation, even though manufacturers, service providers and infrastructure firms expect input costs to soften and output prices to rise.

Prices of Indian basket of crude rose to $86.26 a barrel on an average till August 8 against $80.37 in July and $74.93 in June.

The panel kept its projection for economic growth intact at 6.5 per cent for 2023-24 with the first quarter yielding 8 per cent, the second quarter 6.5 per cent, the third 6 per cent and fourth 5.7 per cent expansion. Quarterly gross domestic product (GDP) growth was kept at the same rate as was pegged in the June review.

The MPC expects household demand to get a boost from the recovery in kharif sowing and rural incomes, buoyancy in services and consumer sentiments.

Capex, on the other hand, is getting support from a healthy balance sheet of companies and banks, supply chain normalisation, business optimism and robust government capital expenditure.

There are signs that capex is getting broad-based, the MPC said.

However, the panel cautioned against external scenarios such as weak global demand, volatility in global financial markets, geopolitical tensions and geoeconomic fragmentation.

Projections of retail price inflation rate by MPC (in %)

Quarter April policy June policy review  August policy review 
Q1, FY'24 5.1 4.6 4.6*
Q2, FY'24 5.4 5.2 6.2
Q3, FY'24 5.4 5.4 5.7
Q4, FY'24 5.2 5.2 5.2
FY'24 5.2 5.1 5.4
Q1,FY'25     5.2
Note: * actual inflation number 
Source: RBI

First Published: Aug 10 2023 | 12:44 PM IST

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