“We anticipate continued supply-side interventions, resulting in inflation levels above 6 per cent in July and August, driven by high vegetable prices,” stated Nomura economists.
In the previous year, inflation exceeded the 6 per cent mark for over three consecutive quarters, which is the upper tolerance level under the flexible inflation targeting system. As a result, the Reserve Bank of India (RBI) wrote a letter to the government explaining the reasons for the price rise exceeding the established threshold.
From May 2022, the RBI began implementing rate hikes, raising the repo rate by a total of 2.50 per cent in policy actions in an attempt to combat the increase in prices.
Earlier this year, the central bank paused its rate hike cycle in favor of focusing on economic growth, and many analysts are expecting an extended pause in policy rates before interest rate reductions commence.
Consumer Price Inflation (CPI) rose to 4.81 per cent in June from 4.31 per cent in May, driven by a surge in food prices. In June, Nomura indicated that rice inflation rose to 12 per cent, up from the previous 9 per cent, and daily data suggests further price increases in July. Last year, the government implemented a 20 per cent export tax on non-basmati rice, and with the recent ban, 42 per cent of rice exports are now restricted, according to Nomura.
The note also mentioned that delayed and uneven monsoons are disrupting paddy sowing, resulting in a 6 per cent decrease as of mid-July.
“The export ban is the latest in a series of supply-side interventions, demonstrating that inflation is a political priority, particularly with state elections in Q4 2023 and general elections in Q2 2024,” stated the brokerage.
Additionally, the note mentioned that India accounts for 40 per cent of global rice exports, and this ban will affect global prices.
Thailand may benefit from this Indian move as it is a net rice exporter. Countries that import rice, such as the Philippines, Singapore, Hong Kong, and Malaysia, may be impacted by this decision, the note added.