Decline in commodity prices will help in lowering India's inflation rate

11 Jul 2022 , 11:34 AM

A sharp decline in commodities, particularly palm oil, which may result in a few months of “unexpectedly low” food inflation, would be welcomed by policymakers and consumers in India.

As supplies have increased and speculators have reduced their bullish wagers, cooking oils, which are required to prepare nearly every basic food in India, have fallen to their lowest levels in months. That lessens worries about out-of-control inflation and anticipations of more ferocious interest rate increases.

India is the largest consumer of edible oils in the world and imports meet around 60% of its requirements. Palm oil has fallen 40% from a record close in April after rising after Russia’s invasion of Ukraine and Indonesia’s temporary export embargo.

Since the start of the year, inflation has continued to exceed the Reserve Bank of India’s maximum tolerance limit of 6 percent, forcing it to increase rates by 90 basis points during the past two months.

Export restrictions on wheat and sugar to protect domestic supply are among the other steps taken by Prime Minister Narendra Modi’s administration to combat inflation. The price of food, which makes up approximately half of India’s consumer price basket, has decreased because to tax cuts on several edible oils and petroleum products.

Fears of a global economic crisis have dampened sentiment on the commodities market. Since its high in March, the price of crude oil has fallen by nearly 20%; since late April, the price of soybean oil has fallen by 30%; and the price of wheat and corn has also fallen.

As global prices decline, domestic prices are also beginning to decline. According to official statistics, the average retail price of edible oils in India has decreased by as much as 8% in the last month.

The bank stated that “in the short-term, we may be due a few months of relatively low food price inflation,” which will contribute in easing pricing pressures elsewhere.

However, given the uncertainties still there, the price decline could not be enough to persuade the RBI to lessen its fight against inflation.