Upsetting budgets of households and even burger chains, the prices of tomatoes have jumped 5 times since June. For RBI Governor Shaktikanta Das, vegetable inflation has made the 4% CPI inflation target look more elusive.
To find out whether tomato-nomics will force RBI to hike rates, let us look at the past 12 instances of TOP (tomato, onion, potato) price hikes since 2010.
While tomato prices increase almost every June-July, potato prices increase after every two years and onion prices rise after every 2.5 years. Given the seasonal nature of price shocks and the fact that these spikes fizzle out within a few months, the RBI has mostly refrained from making its decision while looking at the vegetable basket.
In the last 12 such instances of trouble in TOP basket, RBI has kept the policy rate unchanged six times, according to a report by Bank of America (BofA). The central bank reduced the repo rate twice by 25 basis points each (including the 2019 onion price peak) and even reduced the policy rate on two such occasions.
In 2010, when tomato prices rose from June to August, the repo rate was raised from 5.5% to 5.75%. Again in September and November 2010, repo rate was raised twice but WPI non-food inflation, which had shot above 10%, was the main concern.
In 2013, when onion prices were on a high from July to December, RBI repo rate rose 25 bps to 7.75%. CPI, at that time, was high in both food and non-food subgroups.
Three instances of TOP price hike cycles seen in between 2014 and 2017 had RBI keeping its repo rate unchanged.
In FY 2019-20, when onion prices were on a high in between October and February, repo rate was reduced by 25 bps in October and kept stable in the next two meetings. The rationale behind the move was that food inflation was high mainly owing to high onion prices, but other subgroups reflected deflationary pressures.
In the last two instances – potato price hike from Sep-Dec 2020 and tomato-onion price spike from September 2020 to January 2021 – RBI had kept the repo rate unchanged.
Citing this data, BofA said it expects RBI MPC to deliver a hawkish hold this time and retain the stance as withdrawal of accommodation.
“That said, we are looking at another 25bp repo rate hike in the remainder of CY23 as the 4% CPI inflation target is still elusive and agree that the inflation battle is only half won. So, it’s not the fleeting tomato price spike that may result in another hike but the protracted journey to the target,” it said.
Between June 1st and Aug 5th, retail tomato prices have shot up 444%. Although its weight in CPI is only 0.6, this increase is likely to add 120 bps to headline numbers. Tomato, onion and potato together account for only 2.2% of headline CPI but contribute nearly 50% to the variance in headline inflation.
Based on full month’s food price data, Nomura expects CPI inflation to rise to 6.9% YoY in July vs 4.8% in June, sharply above the RBI’s 2-6% target range. Excluding vegetables, CPI inflation is likely to remain unchanged at 5.2%.
“We don’t expect any spill-overs from food inflation to core inflation, as the rise in prices is expected to be temporary. Core CPI inflation is expected to remain steady at ~5.1% for the rest of FY 2024. This should be a source of comfort for the RBI & we expect RBI to keep rates unchanged and continue with “withdrawal of accommodation” monetary policy stance,” Deepak Agrawal, CIO- Fixed Income, Kotak Mahindra AMC.
RBI Governor Shaktikanta Das will announce the outcome of the three-day meeting of the rate-setting committee MPC on Thursday morning.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
