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Opinion: RBI Caught Between Tomatoes and Cookies

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Food prices in India are sending confusing signals – cookies are becoming more affordable, but meals are turning more expensive. While the former may be a more permanent indicator of commodity inflation, could the central bank really afford to ignore the latter as transient?

The cost of a home-cooked vegetarian lunch or dinner in the world’s most-populous nation jumped by 28% in just one month, largely because of tomatoes. In New Delhi’s Azadpur, one of Asia’s biggest perishables markets, prices have shot up 17-fold since the end of May.

Most other commodities, though, are taking a breather after last year’s surge. The scorching inflation that followed Russia’s February 2022 invasion of Ukraine has eased. Wheat in the wholesale market is 8% softer than at the start of this year, while palm oil has crashed 30% from a year earlier. Laminates and corrugated boxes have become a lot cheaper, too. That’s bringing in more competition into packaged food, with smaller players turning aggressive on pricing.

Demand is weak, particularly in rural areas. And yet, most Indian consumer staples firms’ profitability is on the mend. Last year, they had to resort to shrinking pack sizes. Now, they can afford to stuff more commodities into them.

That may be the biggest priority for the likes of Britannia Industries Ltd. The country’s No. 1 maker of bakery products sold 9% more of its bread, Good Day cookies, JimJam biscuits and Winkin’ Cow milkshakes last quarter just to hold on to volumes that were flat from a year earlier, according to Jefferies. “Near-term focus is on driving volume growth, which will improve going forward, partly as grammage increases starts to flow through,” the brokerage’s analysts wrote this week.

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All this is complicating the Reserve Bank of India’s task. On Thursday, the monetary authority kept its policy unchanged. While that was expected, the key question is about its stance in the months ahead. After having raised interest rates by 250 basis points to 6.5%, should the central bank take its cue from packaged food and start preparing the market for cuts next year? Or should it remain hawkish, lest runaway vegetable prices lead to a fresh surge in inflation expectations? I would argue that the RBI should delay a rate cut, and perhaps even slip in one more increase to bring its full-year inflation forecast, which it revised higher to 5.4% on Thursday, closer to its target of 4%.

Typically, vegetable price shocks in India dissipate in four to six months, a good reason for the RBI to ignore the tomato fever. But the problem is that potato and onion prices are also starting to firm up. Uneven monsoon rains, thanks to the return of the El Niño weather pattern, are the main culprit. Then there’s climate change, which, as my colleague David Fickling has argued, is choking India’s food security.

The government of Prime Minister Narendra Modi has acted preemptively by banning some overseas rice shipments from India, a decision that has played a big role in pushing Asia’s benchmark grain price to a 15-year high; restrictions on sugar exports may be up next. New Delhi may also reduce or scrap a 40% import duty to keep the domestic wheat market well supplied. But because of vegetables, the food inflation genie appears to be already out of the bottle. 

A meal of rice, roti, dal, veggies, salad and yoghurt, whose prices are computed every month by CRISIL, an affiliate of S&P Global Inc., shot up to 33.7 rupees /(41 US cents)  in July. Compared with June, that’s an extra food budget of almost 2,000 rupees a month for a family of four, a significant burden for a single-income family earning the pre-pandemic median wage of 10,000 rupees. Modi would be wary of wading into next year’s general elections with opposition parties making an issue of high inflation.


There are other reasons to stick with higher-for-longer interest rates. It’s quite possible that last quarter’s relatively subdued 5.2% core inflation – after 17 straight months of 6%-plus readings – is not fully capturing the 11%-22% escalation in rents across Indian cities, according to HSBC Holdings Plc economists. Besides, while China’s consumer prices are now falling, investors don’t seem to believe this bout of deflation will last or  have a major impact on cooling inflation globally.

The US Federal Reserve may still push through another rate increase at its next meeting in September. That would further squeeze the India-US interest rate gap, already at a record low after the Fed’s July hike.

So far this year, the local currency has held steady – investors have been optimistic on India’s growth and the RBI has mopped up the dollars coming into the local stock market to rebuild the reserves that got depleted last year. The rupees it released into the banking system in the process have ensured adequate liquidity. While the Reserve Bank on Thursday did step up measures to freeze some of this surplus cash, falling too far behind the Fed on interest rates could trigger capital outflows if there is a sudden slowdown in growth or a durable spurt in inflation.

Ahead of elections, the RBI would likely prioritize stability above all else. A large section of the population is grumbling about tomatoes that have gone out of their reach. The RBI can’t afford India’s vegetable inflation to get out of hand.

Disclaimer: These are the personal opinions of the author.

(Except for the headline, this story has not been edited by String Reveals staff and is published from a syndicated feed.)

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