Weather, Veggies, And Your Money: Unraveling RBI MPC’s Rate Verdict

Good Morning ☕

The Reserve Bank of India's (RBI) rate-setting panel, the Monetary Policy Committee (MPC), began its three-day bi-monthly meeting on August 8th, with a keen focus on the country's economic conditions. The rising food prices in India have raised concerns, and all eyes are on the MPC to see how they plan to cope with inflation.

The State of Inflation

Retail inflation in India witnessed an increase, reaching 4.81% in June 2023 after plummeting to a 25-month low of 4.25% in May. This recent spike in inflation has put significant pressure on the central bank to devise strategies to control rising costs.

Key Factors That Could Shape the MPC Decision

1. Weather Conditions

India's heavy reliance on agriculture means that weather patterns significantly influence the economy. Disruptions in the monsoon season and erratic rainfall have resulted in lower sowing for Kharif crops. This lack of consistency will likely act as a catalyst for inflation, prompting the RBI to consider measures to keep prices in check.

India's weather department has forecasted below-average rainfall for August, attributed to the El Nino weather pattern. Rainfall was already 9% below average in June, with some states experiencing a 60% deficit. This has led to delayed sowing of summer crops, potentially affecting their growth and increasing the risk of higher inflation in the coming months.

2. Increase in Vegetable Prices

Prices of essential vegetables like tomatoes, chillies, and ginger have reached as high as Rs 300/kg, Rs 100/kg, and Rs 400/kg respectively. This surge in prices has been driven by high demand and erratic rains, heavily impacting Indian consumers.

This price spike is likely to influence food inflation, which accounts for nearly 40% of the Inflation basket. Deutsche Bank India economists have predicted that the July CPI may reach 6.7% on a yearly basis, up from 4.8% in June.

The RBI might respond with measures to reduce these prices, especially considering that vegetable prices, constituting a 6% weightage in the CPI, hit a seven-month high in June. Traders expect prices to remain elevated until October, as monsoon disruptions continue to impact the supply chain.

Higher prices of staple vegetables could not only cause public discontent but might also further fuel retail inflation, thereby diminishing the possibility of RBI lowering rates this year.

3. Global Peer Pressure

The Federal Reserve's decision to hike its key policy rate to 5.25% and the Bank of England's 14th quarter-point increase to control inflation might impact the RBI's decisions. The RBI has been following a similar strategy but paused its consecutive hikes in June, signifying the scope for further increases.

Global commodity prices and geopolitical actions, such as Russia's withdrawal from the Black Sea grain deal, have also contributed to constant rate hikes and may further influence the RBI's strategy.

Expert Opinions and Expectations

An ET poll suggests that the RBI's MPC may keep the repo rate unchanged at 6.50%, maintaining its current stance. A Reuters poll of economists corroborated this view, with expectations of no change in the repo rate.

Chief economist Madan Sabnavis of Bank of Baroda stated, "Inflation is expected to head towards the 6% mark because of vegetables and pulses prices going up. We expect this to be temporary in nature and therefore there is no case of increasing rates."

From May 2022 to February 2023, the MPC has increased the repo rate by a total of 250 basis points to combat inflation. Several economists predict that the CPI inflation may continue to trend upward, ranging between 6.0-6.5% for July, compared to 4.81% in June.

Just IN:

The Reserve Bank of India (RBI) has kept the repo rate unchanged at 6.50% for the third consecutive cycle, aiming to keep retail inflation within a 4% target. RBI Governor Shaktikanta Das noted rising inflation led by vegetable prices and raised the CPI inflation forecast for FY2023-24 to 5.4% from 5.1%. The GDP forecast remains at 6.5%. The RBI emphasized vigilance regarding inflation trends and readiness to act if necessary.

Important News of the Day

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3. India's July inflation likely breached RBI's 6% upper tolerance level: Poll

India's retail inflation is likely to have accelerated to 6.40% in July, breaching the upper end of the Reserve Bank of India's 6% tolerance level, according to a Reuters poll of 53 economists. The surge in food prices is believed to be the main cause of the increase in inflation. The consumer price index (CPI) rose at an annual rate of 6.52% in January, breaching the RBI's tolerance level for the first time since October 2022.

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6. After tomato, onion prices likely to rise in coming days

Onion prices are expected to rise to ₹60-70 per kg in September due to tightened supplies and reduced shelf life, following the trend of tomato prices. Onion prices have already jumped from Rs 1,200 per quintal on August 5 to Rs 1,900 on August 7, and they stood at Rs 2,500 a quintal on August 9.

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8. Steep decline in number of consequential train accidents: Govt

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10. Filing Fake Deductions and Rent Receipts in Income Tax Returns in India May Incur Heavy Penalties

Claiming false deductions and presenting fabricated rent receipts during income tax filings in India can result in severe financial consequences. Taxpayers engaging in such deceitful practices may face substantial penalties. The penalties for tax evasion vary, with the Indian Internal Revenue Service imposing a penalty of 0.5% on unpaid taxes for each partial month.

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