MSP hike unlikely to boost much rural demand, says Kotak Securities

New Delhi, June 9 A hike in Minimum Support Prices (MSP) for the kharif crops were quite subdued on the back of Commission for Agricultural Costs & Prices' estimated cost increases, and it is not a real boost for the rural demand, said brokerage house Kotak Securities in a report.

The Cabinet Committee on Economic Affairs (CCEA) on Wednesday approved the increase in the Minimum Support Prices (MSP) for all mandated Kharif crops for marketing season 2022-23 by 4-9 per cent.

"This (hike) bodes well for keeping inflationary pressures in check. However, rural demand is likely to remain subdued with sentiments being boosted in case of a good monsoon and prospects of a bumper harvest," the report said.

The Commission for Agricultural Costs & Prices-computed input price index for cost of production calculations increased by 6.8 per cent in FY23, which is much lower than expectations which were shaped by sharp price increases in fuel, fertilizers and seeds.

"Historically, normal MSP price increases have had negligible impact on market prices. APMC price trends suggest that most key crops are above the MSP prices thereby negating much of the impact of the MSP hikes."

With MSP increases being moderate, the risks to inflation from outsized MSPs increases are also reduced, it said, adding that it maintains an average inflation estimate at around 6.5 per cent for FY23, as against RBI's estimate of 6.7 per cent.