Although markets and the Reserve Bank have pinned their hopes on monsoon, but a good monsoon is not likely to help lower food price inflation in 2016, says a Nomura report.
According to the global financial services major, the correlation between rains and food price inflation is "low".
"Rather than monsoon rainfall, we find that minimum support prices, nominal rural wages, non-labour agriculture input costs, and global food price trends are important drivers," Nomura said in a research note.
The Japanese brokerage firm noted that "as the above drivers of food price inflation have already stabilised, we do not expect food price inflation to fall from current levels, even if monsoon rains are normal".
Nomura expects average food price inflation at around 5-5.5 per cent in this fiscal as against 5.1 per cent in financial year 2015-16.
The report said it is not empirically evident that below-normal monsoon rains lead to high food price inflation, while normal rainfall lead to low food price inflation.
"Using data for the last 15 years (fiscal 2001-02 to financial year 2015-16), we estimate that the correlation between monsoon rainfall and food price inflation is 0.14 (ideally the correlation should be negative)," it added.
Of the last eight episodes of normal and above-normal monsoon rains, only two years (2003-04 and 2005-06) have seen food price inflation under 5 per cent.
Similarly, below-normal monsoon rains do not mean higher food price inflation. Of the last seven such episodes, three still had food price inflation under 5 per cent.
According to Nomura there are four key drivers of food price inflation - nominal rural wage growth, minimum support prices, other agricultural input costs and global food price trends.
"Our analysis suggests that rains are not the primary driver of food price inflation. Even with below-normal rains, food price inflation can remain contained if rural wages and other costs are low. Similarly, despite normal/above-normal rains, food price inflation can spiral if production costs rise sharply," it said.
