What will the rising mercury this year mean for inflation in India?
India’s balance of food-supply likelihoods has raised the question of whether fiscal 2024-25 will see monetary easing at all
is executive director and senior economist at DBS Bank.
Temperatures continue to hit new highs every subsequent year. In its March 2024 update, the World Meteorological Organisation’s (WMO) annual State of the Global Climate report confirmed that 2023 was the warmest year on record, with the global average near-surface temperature at 1.45° Celsius above the pre-industrial baseline. Add to this, it was the warmest 10-year period on record. The agency added that the 2023-24 El Niño had peaked, but was still one of the five strongest on record. While the weather pattern was gradually weakening, it will continue to impact global climate, with above-normal temperatures predicted over almost all land areas between March and May this year.
The India Meteorological Department recently predicted that above-normal temperatures are likely to prevail over most parts of the country during the 2024 hot weather season (April to June), except some parts of east, northeast and northwest India. In official parlance, a heatwave is recorded if the maximum temperature of a station reaches at least 40° Celsius for plains and 30° Celsius or more for hilly regions. A departure from normal in the range of 4.5-6.4° Celsius is viewed as a heatwave, while anything more than 6.4° Celsius above the norm is termed a ‘severe’ state.
Bolster defences: Indian authorities have taken proactive measures to mitigate the impact of heat. For instance, power ministry officials have held reviews on ensuring uninterrupted power availability in cooperation with counterparts like India’s coal and railway departments. Coal stocks have also been built up to meet peak demand, which is likely to be higher this year than experienced in past summer months. The ministry has projected 260GW peak power demand in the second quarter of 2024, higher than the record set by the third quarter of 2023. Despite greater installed capacity for renewable energy, the country’s base load is still fossil-fuel heavy.
Concurrently, a two-decade long emergency provision has also been invoked that will require idle gas-fired power stations (left unused due to commercial concerns) to operate through May and June to meet an increase in electricity demand and prevent shortages akin to 2022. Earlier, an emergency rule for coal imports was invoked; it was supposed to be in force till June, but will now run through the end of the third quarter. Lastly, regular maintenance of power plants will be deferred to the monsoon period and new capacity additions will be fast-tracked. The general elections underway will span May, with results due on 4 June.
Economic impact: The economic impact of heat is likely to be the most telling on perishable crops— especially vegetables beyond the T(omato) O(nion) P(otato) three—and food-led inflation, aggravating the seasonal increase in prices during summer, apart from on public health. The zaid season—i.e., the period between rabi and kharif—covers shortduration crops, including some vegetables, fruits and fodder. While the impact on rabi crops is likely to be limited, as harvesting is already underway, daily data shows that select vegetable prices have risen, impacted by inadequate cold-chain infrastructure and the fallout on standing crops.
Food has already punched above its weight in the past 7-8 months, with vegetable inflation unlikely to materially recede from the prevailing 28% year-on-year pace. Notably, costs did not correct to the extent expected during winter, with high temperatures now likely to keep year-on-year growth in double digits over the next few months. The retail prices of potatoes were up 22%, onions 40% and tomatoes 36% in March 2024 from a year before, with other seasonal varieties also likely to be vulnerable. If the month-on-month increase in sequential food inflation quickens from our baseline of 1.1% quarter-on-quarter in April-June 2024 to 1.8-2.0%, headline inflation can potentially jump by 50-70 basis points in the quarter, taking fullyear inflation 40-50 basis points above our baseline at 4.5% year-on-year in 2024-25.
Short-term solutions—such as improved supply networks, better inter-state movement and rotation of short cropping cycles—can be deployed, but are unlikely to provide immediate relief. The strengthening of India’s cold-chain infrastructure and handling of produce will gain importance. Reliance on the upcoming monsoon is high. Today’s reservoir level is at about 31.4% of full capacity, lower than 39% in the comparable period last year. Rains are dearly needed. Dissipating El Niño and the start of La Niña in the third quarter would bode well for crop output and resultant farm income levels, but the spatial and temporal variation of monsoon rains will be equally pertinent.
Policy impact: RBI’s Monetary Policy Committee (MPC) has maintained a cautious and hawkish stance. The impact of weather conditions on food inflation—and consequently on inflationary expectations—will be closely monitored. Given the global conditions, including delays in the US ratecutting cycle, higher oil prices and fluctuations in the value of the rupee, we expect the MPC to extend its wait-and-watch mode and track the monsoon’s progress. The debate over RBI’s policy path ahead has shifted from what ‘the scale of cuts’ will be to whether there will be ‘cuts at all’ in 2024-25. Upside risks to the central bank’s inflation forecast of 4.5% for 2024-25 are also likely to delay any change in its policy stance to ‘neutral.’
Domestic 10-year bond yields have corrected from their mid-April highs, but a dip below 7% is unlikely amid still-high oil prices, a strong dollar and hardening US Treasury yields. The next catalyst for debt markets will be the upcoming index inclusion of Indian bonds, with the first of the global benchmark indices due to start this process in June 2024 and another in January 2025. Mindful of the volatility that could accompany these inflows, India’s monetary authority has steadfastly kept the currency on an even keel, whilst absorbing incremental inflows into its foreign exchange buffer.