Sizzling onion prices seen unlikely to alter India’s rate stance

- ADVERTISEMENT -

A more than 200% surge in onion prices pushed India’s headline inflation rate to its highest level since July 2018, but is unlikely to deter Asia’s most-aggressive central bank from further easing monetary policy.

Consumer prices rose 3.99% in September from a year earlier, with vegetable prices increasing 15.4% on year, data published by the Statistics Ministry showed Monday.

Prices of onions, as well as tomatoes, soared in September after heavy monsoon rains damaged crops and reduced supplies. With high prices of the kitchen staples known to have contributed to bringing down past governments, Prime Minister Narendra Modi’s administration banned onion exports and cracked down on hoarding to keep a lid on costs.

Economists see no such threat to the central bank’s accommodative monetary policy stance, which paved the way for 135 basis points of easing so far this year, given persisting weakness in the economy. Data Friday showed factory output declined for the first time in more than two years in August amid waning demand overall.

“We expect food related price pressures to continue until October and thereafter begin easing,” said Shubhada Rao, chief economist at Yes Bank Ltd., who expects 25-40 basis points of rate cuts in the remainder of the current fiscal year. “With growth numbers remaining fairly weak, we expect RBI to continue with its rate cuts.”

Data earlier Monday showed wholesale price inflation in September easing to 0.33%, the weakest pace in more than three years. While prices of manufactured products and fuel and lighting declined, food inflation was at 7.47%. Wholesale onion prices more than doubled, according to data.

Surplus rainfall suggests a record summer harvest is likely, and that should keep food inflation low in the year ahead, according to Bloomberg Economics’ Abhishek Gupta.

Cost of onions rose to as high as 80 rupees ($1.13) a kilogram in September from 20 rupees to 25 rupees the previous two months. Tomato prices in New Delhi have more than doubled to 60 rupees to 70 rupees per kilogram in the past weeks.

Onions have a weight of 0.6% in the overall inflation basket and contribute about 10% to the vegetable basket.

The inflation-targeting Reserve Bank of India expects food prices to stabilize, while forecasting headline inflation to stay well below its medium term target of 4% for the rest of the fiscal year through March.

Besides, core inflation, which strips out volatile food and fuel prices, is likely to show that demand pressures are rather weak. That should keep alive expectations of more rate cuts by the RBI in the coming months.

Bloomberg Economics’s Gupta expects core inflation to ease for a number of reasons.

“These include companies reducing prices to pass on the benefit of recent tax cuts to consumers, lower tax rates on consumer goods and services, an increase in the supply of affordable housing, a wider output gap, a sharp drop in crude oil prices, and strong favorable base effects during the October-to-December months,” he said.