With elections in sight, low food prices are a budget problem for PM Modi

A low inflation spell in an election year should be good news for any government, right? Wrong.

For Prime Minister Narendra Modi, the subdued inflation numbers, due largely to low food prices, may present a budget problem. His government may have to shell out more to compensate farmers for low market prices of some crops under a plan announced this year with a view to double farm incomes by 2022.

“India’s falling food prices could become a bane for Modi,” said Soumya Kanti Ghosh, chief economic adviser at the nation’s largest lender State Bank of India. “A bumper harvest that’s led to crashing of food prices will increase the burden on the government to compensate farmers.”

In July, the government raised support prices of crops such as cotton, soybeans and paddy rice to ensure farmers get at least 50 per cent more than the estimated production costs. That means in the event of a crash in market prices, the government would have to chip in and ensure the sale of the produce by farmers at guaranteed prices.

RBI expected to be less hawkish, may leave interest rates unchanged

MARKET NEWS- The Reserve Bank of India (RBI) will likely strike a less hawkish tone while leaving interest rates unchanged at a policy meeting on Wednesday, according to analysts, as inflation is running well below forecasts, and the economy has slowed more than expected.

A Reuters poll showed 56 of 60 analysts expected the RBI's monetary policy committee to keep its repo rate unchanged at a 6-1/2 year low of 6.25 per cent for the fourth meeting in a row. They also expected the reverse repo rate to be left at 6.00 per cent.

What analysts and investors are looking for this time is a less hawkish policy statement to reflect reduced fears of inflationary pressures.

Until a few weeks ago, bond market investors were on guard for possible future increases in interest rates after the RBI warned of "upside risks" to inflation at its last policy meeting in April.

"We don't expect any change in the official neutral stance in June but we do expect RBI to tone down its hawkishness compared to the April and February policy statements," said Siddhartha Sanyal, chief India economist at Barclays.

Investors have begun pricing in a softer tone from the RBI, with benchmark 10-year bond yields down about 35 basis points since hitting an over 7-month high on May 2. Some bolder investors are even betting on possible future rate cuts.

Consumer price inflation data for May will be released next week, but going by the April figures inflation is trending well below the RBI's target of 4.5 per cent in the six months to September, and 5.0 per cent for the six months through to March next year.

Notching its lowest annual rate in at least five years, consumer price inflation slowed to 2.99 per cent in April from 3.89 percent in March, just below the RBI's target of 4.0 per cent.

Meantime, the economy suffered a sharper setback than many economists had expected from the government's shock move last November to take high denomination currency bills out of circulation in a bid to curb tax avoidance.

Gross domestic product (GDP) grew 6.1 per cent in January-March, down from 7 per cent the previous quarter, to post it slowest growth rate in more than two years.

Investors' uncertainty over the RBI's stance was heightened by the release of minutes from the April meeting of the monetary policy committee which showed two of its six members had proposed rate hikes, before the committee ultimately voted 6-0 to leave rates unchanged.