RBI MPC meet: The sudden movement of a global index has Shaktikanta Das & co worried

A global index that is certainly a cause for concern among the Reserve Bank of India’s (RBI) monetary policy committee is the FAO Food Price Index (FFPI). 

This is United Nations' Food and Agriculture Organization (FAO) index that tracks monthly changes in international prices for key food commodities like cereals, vegetable oils, dairy products, meat, and sugar.

According to its latest data , the FFPI stood at 124.4 points in September 2024, up 3 percent from August and marking the largest month-on-month increase since March 2022. Between Jan to August this year , the index was stable in the range of 117 to 120.7 points. "Price quotations for all commodities included in the index strengthened ( in September), with the increases ranging from 0.4 percent for the meat price index to 10.4 percent for sugar," it stated. 

The FFPI data is actually for September. The ongoing Israel-West Asia conflict would have put more pressure on the food prices especially through disruptions in global supply chains for essential commodities. The conflict is already causing significant disruptions to key maritime global trade routes like the Red Sea.

Of particular relevance to India is the country's reliance on imports of vegetable oils, which is part of the index. Currently, India is one of the largest global importers of palm oil, soybean oil, and sunflower oil. Under the cereals segment, India occasionally imports wheat in years when domestic production falls short, in order to meet demand. There were reports recently that India is set to import wheat this year. 

Clearly, these  rising global food prices, especially in oils and cereals, will raise  inflationary concerns and adding pressure to India’s inflation management strategy.

In August policy, the Governor quoted the FAO food price index, which after registering an increase during March-June 2024, declined in July, with a month over-month change of (-) 0.18 per cent. It was a good comforting factor for the RBI. 

In fact, many central bankers, including those in India, had been anticipating a decline in global food prices, which could ease food inflation pressures. This would have allowed for a shift in monetary policy, giving policymakers room to reconsider their tightening stance. 

However, recent developments post the  Israel-West Asia conflict suggest that this scenario is becoming less likely, as global commodity prices , firming up of oil prices and currency depreciation remain elevated, keeping inflationary pressures intact. Indranil Pan, Chief Economist, YES BANK on his expectation from the MPC, has noted that the RBI will have to be guarded of global risks to inflation emanating from a sudden jump in the commodity prices, a China recovery etc. 

As per food data, India is reliant on imports which account for more than half  of its domestic demand for edible oils. While the govt has undertaken steps to promote self-sufficiency by launching  National Mission on Edible Oils , the results of this initiatives will take time. Similarly, India's urea imports come from countries like Oman, Qatar, Saudi Arabia, and the United Arab Emirates, which could  be impacted by the ongoing conflict. 

It will be interesting to see if the RBI revises its inflation projection of 4.5% for FY 2024-25. According to the RBI, CPI inflation is expected to rise to 4.7% in Q3 (October-December) as the favorable base effect diminishes. The Q2 ( July-Sept) was expected to show moderation in inflation due to base effect. The retail inflation rate in August had actually crashed to 3.6% on a year-on-year basis, which is well within the RBI’s targeted level. " But its durability is a concern," says Umesh Mohanan, ED & CEO, Indel Money, a financial service company. He explains that it is highly likely that the CPI-based inflation numbers may breach the current lows in the coming months due to multiple reasons. One, higher spending during the festive season may lead to a spike in inflation. Two, geopolitical conflicts in West Asia will push crude oil prices up, which will eventually trigger inflation in the domestic economy.

The tomorrow's MPC meeting will also be the first to include three newly appointed external members -Prof. Ram Singh, Saugata Bhattacharya, and Dr. Nagesh Kumar. Their views on interest rates and inflation will be closely watched. In the last MPC meeting, two external MPC members dissented on keeping the repo rate unchanged at 6.5 per cent. These divisions within the MPC signal that  growth-inflation balance remains a critical issue, and it will be interesting to see whether the new members bring fresh perspectives.