'Heat wave also pushed food inflation; expect CPI to come at 6.8 pc in FY23'

The heat wave in early 2022 was the key domestic factor responsible for pushing up food prices this year, a Crisil Rating arm said on Monday.

Crisil Research pegged the headline consumer price inflation to come at 6.8 percent in FY23 - marginally higher than the Reserve Bank's 6.7 percent estimate - because of the pressures on the food front, where the increase in prices has been double that of FY22.

The RBI has been blaming the Russian invasion of Ukraine and the consequent surge in commodity prices for a bulk of the surge in inflation, which has consistently breached the upper end of the tolerance band set for it by the government.

At present, food commands 39 percent of the CPI basket.

''The recent rise in food inflation is mainly supplied shortages-led, driven by both global (geopolitical conflicts) and domestic (impact of heat wave) factors,'' the Crisil Research note said.

''Our forecast of CPI inflation at 6.8 percent is premised on food inflation at 7.0 percent, which is double last fiscal's,'' it added.

Noting that the monetary policy has a ''food inflation nightmare'', it said the heat wave which took the average temperatures in the northwest and central India to the highest level in 122 years, spoilt the prospects for the wheat crop, groundnut, bajra, and horticultural crops like mango.

''The heat wave was the key domestic factor responsible for pushing up food prices this year,'' it said, pointing to a 2020 RBI study which said macroeconomic impact of climate change on food inflation has been statistically significant for India over the past two decades.

It cited studies which say the frequency of purchase of items — rather than their expenditure share — is what shapes inflation expectations.

''So long as food inflation continues to rise or remains high, it will be that much more difficult for monetary policy to anchor inflation expectations,'' it said, adding that this underscores the importance of deliberating the impact of climate change on inflation and on monetary policy.

The RBI's rate-setting panel is meeting this week for the bi-monthly review of the monetary policy and its outcome is scheduled to come out on Friday, which will have the rate decision and also a review of the estimate on inflation trajectory from here on.