India Inflation Eases, But Modi's Farm Pledges May Fan Prices

(Bloomberg) -- Inflation may be easing in India, as data on Thursday showed, but there are mounting risks.

At the top of the list is Prime Minister Narendra Modi’s plan to raise the prices of food crops to help distressed farmers, a key voter base.

His government is seeking to pay farmers at least 50 percent more than the cost of their produce, boosting the retail prices of about a dozen monsoon-sown crops, due for harvest in October. Details of the initiative, which was first announced in the February budget, are expected soon.

The plan will help Modi fulfill his promise of raising incomes to placate farmers saddled with higher debt amid falling commodity prices, and shore up his support ahead of federal elections early next year. But it’s expected to fan prices at a time when oil is surging, putting further pressure on bond yields.

Government data on Thursday showed India’s retail inflation eased to 4.28 percent in March from 4.4 percent in the previous month. While that’s above the 4.10 percent median estimate of 39 economists surveyed by Bloomberg, the level is the lowest in five months and below the central bank’s projected 4.5 percent pace for the fourth-quarter of fiscal year 2018.

The softening in inflation in March may be temporary and was due to a decline in food prices. Pulses and rice are among crops that are eligible for the minimum support price announced by Modi’s administration.

“I don’t expect the slowing to continue for long with rising oil prices,” said N.R. Bhanumurthy, an economist at Delhi-based National Institute for Public Finance and Policy. “The pass through of higher oil prices will be quicker, sharper and stronger in the coming days.”

Already, a surge in Brent oil to above $70 a barrel wiped out most of the gains in bonds from last week. Sovereign Indian bonds rose for the first day in five ahead of the data release, on expectations of a lower inflation reading. The yield on the benchmark 10-year debt fell 7 basis points to 7.47 percent on Thursday.

The central bank last week held its benchmark interest rate and lowered its inflation projections for the fiscal year that began on April 1, while listing the plan to provide minimum support prices for monsoon-sown crops as a risk to inflation.

“The exact magnitude will be known only in the coming months,” the rate-setting Monetary Policy Committee said.

Putting a floor under food prices will directly feed into food inflation, said
Sonal Varma, the Singapore-based chief India economist at Nomura Holdings Inc., projecting a 60 basis points increase in consumer price inflation because of an increase in support prices this year.

“A lot of rural wages and government salaries are linked to CPI,” she said. “That can have second round effect.”

Inflation usually inches up in the year before national elections in India as governments and political parties start pumping in more money to improve their electoral prospects.

Modi’s decision to put more money in the hands of farmers, along with boosting spending on rural infrastructure and job programs, is bound to stoke consumption. Expectation of normal monsoon rainfall, the main source of irrigation for the nation’s 263 million farmers, will also help drive up income of farmers.

“It will have repercussions for higher inflation,” said Sameer Narang, chief economist at Vadodara, India-based Bank of Baroda. “The Reserve Bank will become slightly more hawkish if the hike in minimum support prices is higher than expected.”

--With assistance from Manish Modi and Archana Chaudhary

To contact the reporters on this story: Vrishti Beniwal in New Delhi at vbeniwal1@bloomberg.net, Bibhudatta Pradhan in New Delhi at bpradhan@bloomberg.net.

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Ruth Pollard at rpollard2@bloomberg.net, Karthikeyan Sundaram, Jeanette Rodrigues

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