Even a normal monsoon may not cool food prices: Nomura Financial Advisory

MUMBAI: Food price inflation will remain at current levels or rise further even if monsoon this year is normal, Japanese brokerage Nomura Financial Advisory said in a report.
Nomura economists Sonal Varma and Neha Saraf explained that rains have little effect on food prices and it is rural wages, minimum support prices and global trends that impact prices in a bigger way.

Varma and Saraf analysed data for 15 years between fiscal years 2002 and 2016 and concluded that the correlation between rains and food inflation is low.

“It is not empirically proven that below-normal monsoon rains lead to high food price inflation, while normal monsoon rainfall leads to low food price inflation… In the past, food price inflation has been low (less than 5% year-on-year) during bad monsoons (as in FY02, FY03, FY05), and high (more than 8%) during good monsoons (seen during FY07, FY09, FY11),” Varma and Saraf said.

The economists analysed eight food categories — pulses, vegetables, fruits, edible oils, egg, meat, milk and fish, but did not find any link in the price fluctuations of any of these categories.

“There’s no single category that’s driving food price inflation up in good monsoon years or down in bad monsoon years. Food shocks have hit different food products across different years, irrespective of monsoon performance. For instance, FY05 and FY10 were both below-normal monsoon years, yet protein food price inflation (pulses, egg, meat, milk, fish) was very low in FY05, but rose significantly in FY10. Contrary to the general perception, we find that food price inflation is more dispersed,” Varma and Saraf said.

In the past 15 years, India has seen above normal monsoon for eight years and only two years (FY04 and FY06) have seen food price inflation under 5%. Similarly, for seven of the 15 years, rains were below-normal but three of those years still saw food inflation under 5%.

The Japanese brokerage expects average food price inflation at around 5 to 5.5% in FY17 compared with 5.1% in FY16.