The recent hike in milk prices by major dairy companies of India is likely to lift CPI inflation for August by 10-30 basis points, economists say.
The Gujarat Cooperative Milk Marketing Federation Ltd, which sells milk under the Amul brand, and Mother Dairy have increased prices of liquid milk by 2 rupees a ltr from Wednesday, to offset rising input costs. The hikes are effective across all regions where the two dairy majors sell milk.
In the CPI basket, the milk and products item carries a weightage of 6.61, and represents 16.92% of the Consumer Food Price Index.
“Increase in milk prices reflects the pass-through of higher costs borne by producers–from feedstock to logistics as well as overall operational costs, including energy…it will add to the buoyancy in inflation numbers,” said Radhika Rao, senior economist, DBS Bank.
India’s annual inflation based on the Consumer Price Index fell to a five-month low of 6.71% in July primarily on account of a sequential decline in prices of vegetables and edible oils. July’s inflation print was impacted partly by a favourable base.
In the coming months, the base will remain high and will continue to reflect in the inflation rates.
If the overall index remains the same, at 173.4, in August, retail inflation will decline to 6.45% purely because of the base effect.
However, higher milk prices will partly offset the impact of a high base, according to economists.
ICICI Bank expects an addition of 20-25 bps in the retail inflation print for August because of the price rise. The projection is in line with Sunidhi Securities, which sees the addition of 22-24 bps in the inflation rate, during the month.
Equirus Group economist Anitha Rangan said the increase in prices could translate to a 30 bps hike in inflation. “Within this (milk and products), milk alone has a 6.42% weight and therefore the direct impact on price hike is very high…adding to the transportation costs and other costs, the additional impact on prepared foods on rise in milk costs could be an added inflationary pressure,” she said.
IDFC FIRST Bank’s India economist Gaura Sen Gupta sees an increase of 12 bps in the inflation rate. “Since the increase in prices is effective from mid-August, the 2-per-ltr increase would translate into 1.9% month-on-month rise in retail milk prices in the current month…this would increase headline CPI by 12 bps in August,” she said.
HDFC Bank also expects an impact of 10 bps on August CPI inflation.
Apart from higher milk prices, the month-on-month increase in prices of rice and wheat will also add pressure on the August inflation print.
“Lower rice output will put upward pressure on the price of domestic rice,” Nomura said in a report. As on Aug 12, farmers across the country had sown rice over 31 mln ha, 12.4% lower than the 35.4 mln ha estimated last year, according to data from the farm ministry.
According to the Department of Consumer Affairs, retail prices of rice, on average, have increased 1.8% on month in August, so far. And prices of wheat have risen by 2.3% on month.
“…higher cereal price inflation could offset the disinflationary forces from lower global commodity prices,” Nomura said.
The cereals and pulses subgroup in the Consumer Price Index carries a weight of 9.67.
RBI Governor Shaktikanta Das said earlier this month that the shortfall in kharif sowing of paddy needs to be “watched closely”, even as buffer stocks are quite large. End
