Food Inflation Expected to Cool in H2FY26 on Better Monsoon, But Adverse Base Effect May Push FY27 Rates Higher

Food inflation in India is anticipated to remain under control during the second half of the current financial year (H2FY26), supported by favorable monsoon rainfall and improved agricultural sowing conditions. However, an ICICI Bank Global Markets sectoral update has cautioned that an "adverse base effect" could drive food inflation higher in the subsequent fiscal year (FY27), presenting challenges for policymakers and consumers alike.

Understanding the Base Effect

The base effect phenomenon plays a crucial role in inflation calculations and can significantly influence reported inflation rates even when actual price levels remain stable. Simply put, inflation can appear unusually high or low depending on the price levels recorded in the corresponding period of the previous year.

For example, if food prices were particularly low in FY26 due to good harvests and favorable weather, the same absolute price levels in FY27 would result in higher year-on-year inflation rates simply because the comparison base is lower. This statistical artifact, rather than actual price increases, can create the appearance of rising inflation.

Near-Term Outlook: H2FY26 Optimism

According to the ICICI Bank report, the outlook for the remainder of FY26 appears favorable for food price stability. The analysis stated: "Higher rainfall and sowing bode well for the outlook in H2FY26, but an adverse base should push food inflation higher next year (FY27)."

Supporting Factors for H2FY26

Several positive developments are expected to keep food inflation contained through the second half of the current fiscal year:

• Better monsoon performance: Above-normal or well-distributed rainfall has benefited agricultural production
• Improved sowing conditions: Favorable weather has enabled timely planting across crops
• Steady supplies: Continued supply of agricultural commodities from good harvests
• Favorable weather patterns: Conducive conditions for crop growth and maturation
• Government interventions: Policy measures to ensure stable prices and adequate supplies

Recent Wholesale Inflation Trends

The optimistic near-term food inflation outlook aligns with recent wholesale price data showing significant cooling in price pressures. India's wholesale inflation has eased to its lowest point in more than two years, providing relief to businesses and consumers.

October Wholesale Inflation Performance

In October, wholesale inflation slipped further into contraction territory, primarily driven by a sharp decline in primary food articles. Key observations include:

• Vegetable prices: Continued to ease due to steady supplies and favorable weather conditions
• Cereals: Recorded price declines reflecting adequate production
• Pulses: Showed falling prices amid improved availability
• Spices: Witnessed price corrections after earlier increases
• Fruits: Also recorded declining prices

Month-on-Month Stability

Month-on-month food prices remained broadly steady, suggesting that the sharp disinflation witnessed earlier is now stabilizing rather than continuing to accelerate downward. This stabilization indicates that prices may be approaching equilibrium levels after the significant corrections seen in recent months.

Primary Articles Category Performance

The wider primary articles category posted another month of contraction, extending its streak of negative inflation readings. This persistent contraction stems from weak pricing in both food and non-food items within the category.

The sustained contraction in primary articles reflects:

• Adequate agricultural production meeting demand
• Weak demand for certain raw materials
• Global commodity price corrections filtering through to domestic markets
• Effective supply chain management ensuring availability

High-Frequency Items: Key Price Corrections

The report highlighted that corrections in key high-frequency food items have played a major role in pulling down wholesale food inflation during the current year. These items, which consumers purchase frequently and which significantly impact household budgets, include:

Tomatoes

Tomato prices, known for their volatility, have witnessed substantial corrections from earlier elevated levels. Improved supplies from multiple growing regions and favorable weather have enabled price normalization.

Onions

Onion prices have also corrected significantly, providing relief to consumers after periodic price spikes that characterize this politically sensitive commodity. Better crop management and government interventions have contributed to price stability.

Grains

Some grain varieties have recorded price declines, reflecting adequate production and healthy stock positions. Government procurement and distribution policies have helped maintain price stability in this essential category.

Fuel Inflation Dynamics

Fuel inflation has remained in negative territory, contributing to overall wholesale price moderation. The key driver has been lower global crude oil prices compared to the previous year, which have filtered through to domestic fuel costs.

While a few petroleum products experienced sequential price increases on a month-to-month basis, the broader fuel and power index remained subdued. This stability in energy costs has positive second-order effects on food inflation by keeping transportation and farming input costs contained.

Manufactured Products Inflation

Inflation in manufactured products has also moderated, with easing prices observed in metals and some industrial inputs. This broad-based price cooling reflects:

• Softer global commodity prices
• Improved supply chain efficiency post-pandemic disruptions
• Moderate demand growth limiting pricing power
• Competition among manufacturers

Sectors Showing Price Firmness

However, certain segments have bucked the broader disinflationary trend, showing firming price pressures:

• Jewellery: Rising prices reflecting gold and precious metal dynamics
• Tobacco products: Price increases potentially driven by taxation and input costs
• Pharmaceuticals: Upward price movements in certain drug categories
• Select fabricated metals: Specific metal products showing price firmness

These pockets of price pressure indicate that global commodity movements could create some upward inflationary pressure in the months ahead, even as the broader trend remains disinflationary.

FY27 Outlook: Base Effect Challenges

While H2FY26 appears favorable for food price stability, the outlook for FY27 presents different challenges. The ICICI Bank report's warning about an "adverse base" reflects the statistical reality that:

• FY26's low food price levels will create a low comparison base
• Normal price levels in FY27 will appear inflationary when compared to this low base
• Even stable absolute prices could result in higher reported inflation rates
• Policymakers will need to distinguish between base effects and actual price pressures

Implications for Monetary Policy

The divergent inflation outlook between H2FY26 and FY27 presents interesting challenges for the Reserve Bank of India's monetary policy formulation:

Near-Term Considerations (H2FY26)

• Benign food inflation may provide room for accommodative policy stance
• Focus can shift to supporting growth alongside inflation management
• Interest rate decisions may prioritize economic momentum
• Policy communication can emphasize growth-inflation balance

Medium-Term Challenges (FY27)

• Need to distinguish base effect-driven inflation from demand pressures
• Communication strategy to manage inflation expectations
• Potential for policy tightening if base effects are misinterpreted
• Balancing growth support with inflation credibility

Agricultural Production and Monsoon Impact

The favorable near-term food inflation outlook is fundamentally anchored in agricultural production dynamics. Better monsoon performance in FY26 has translated into:

• Kharif crop success: Strong summer crop production
• Rabi crop prospects: Good conditions for winter sowing
• Reservoir levels: Adequate water storage for irrigation
• Soil moisture: Favorable conditions for crop growth
• Reduced crop stress: Lower risk of weather-related damage

Government Policy Interventions

Government policies have played a supportive role in managing food prices:

• Buffer stock management: Strategic release during price spikes
• Import-export policies: Adjustments to ensure adequate domestic supply
• Minimum support prices: Providing farmers production incentives
• Targeted distribution: Public distribution system ensuring access
• Market interventions: Direct purchases to support prices when needed

Consumer Impact and Household Budgets

The food inflation trajectory has significant implications for household budgets, particularly for lower and middle-income families where food constitutes a larger share of expenses:

H2FY26 Benefits

• Stable or declining food prices increase real purchasing power
• Household budget relief enabling discretionary spending
• Reduced stress on vulnerable populations
• Support for consumption-led economic growth

FY27 Considerations

• Potential for renewed price pressures from base effects
• Need for income growth to offset any price increases
• Importance of productivity gains in agriculture
• Role of wage growth in maintaining consumption capacity

Global Commodity Price Influence

While domestic factors dominate food inflation dynamics, global commodity movements remain relevant:

• Crude oil prices: Impacting transportation and input costs
• Fertilizer costs: Influencing agricultural production expenses
• Global food prices: Affecting import parity for tradable commodities
• Exchange rate movements: Impacting import costs
• Geopolitical developments: Potentially disrupting global supply chains

Sectoral Variations and Outlook

Different food categories may exhibit varying inflation trajectories:

Likely to Remain Stable

• Cereals with adequate production and stocks
• Vegetables with normal seasonal supply patterns
• Pulses if imports supplement domestic production

Potential Pressure Points

• Edible oils depending on global price movements
• Protein items if feed costs increase
• Spices based on export demand dynamics

Investment and Business Implications

The inflation outlook has implications for various business sectors and investment decisions:

• FMCG companies: Benign inflation supporting volume growth and margins
• Food processors: Stable input costs improving profitability
• Retailers: Price stability supporting footfall and sales
• Agricultural inputs: Demand patterns influenced by crop economics
• Food service sector: Margin management with stable commodity prices

Monitoring Indicators

Key indicators to watch for evolving food inflation dynamics include:

• Monthly wholesale and consumer price inflation data
• Agricultural production estimates and harvest progress
• Reservoir levels and irrigation water availability
• Government stock positions and release policies
• Global commodity price trends
• Weather forecasts and crop condition reports
• Demand indicators from high-frequency consumption data

Conclusion

The food inflation outlook for India presents a tale of two periods: near-term stability in H2FY26 supported by favorable agricultural conditions and good monsoon performance, followed by potential base effect-driven inflation increases in FY27. While the immediate future looks benign for food prices, policymakers, businesses, and consumers should prepare for the statistical artifact of adverse base effects pushing reported inflation rates higher next year, even if actual price levels remain stable.

Understanding this dynamic is crucial for appropriate policy responses and economic decision-making in the coming fiscal year.

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