Monthly economic report of the Ministry of Finance predicts falling food inflation in the coming months due to rain

Food inflation in India is likely to decline in the coming months as abundant monsoon rains have refilled water levels in reservoirs, the Department of Economic Affairs of India's finance ministry said in its monthly economic report on August 22.

According to the latest data, retail inflation in India declined to 3.5 percent in July 2024, the lowest since September 2019, mainly due to a moderation in food inflation. The Finance Ministry report highlighted that the steady progress of the southwest monsoon has favoured kharif sowing.

Retail inflation based on the combined consumer price index (CPI-C) declined from 5.1 percent in June 2024 to 3.5 percent in July 2024, the lowest since September 2019. This was mainly due to a sharp decline in food inflation, which fell from 9.4 percent in June 2024 to 5.4 percent in July 2024. The sharp decline in food inflation was mainly fuelled by a decline in vegetable inflation from 29.3 percent in June 2024 to 6.8 percent in July 2024 and slight deflation in “oils and fats” and spices, the Finance Ministry's review showed.

The replenishment of water levels in the reservoirs is a good sign for the current Kharif and upcoming Rabi crops, it said. This will help in further bringing down food inflation in the coming months, it added.

According to the Finance Ministry's analysis, moderate core inflation and positive progress in the monsoon mean that the overall inflation forecast for the economy is now in positive territory.

The central bank has forecast consumer price inflation at 4.5 per cent for FY25 and second quarter inflation at 4.4 per cent. It may be noted here that the Reserve Bank of India's Monetary Policy Committee, in its meeting in August 2024, decided to keep the policy rate at 6.5 per cent. The committee stressed the importance of continuing the disinflationary approach of withdrawing easing, a strategy that began in April 2022 to gradually bring inflation closer to target while supporting economic growth. A few days ago, the RBI said it would have to take a more cautious tack on monetary policy if high food inflation persists and shows signs of spillover to headline inflation.