Vegetable price decline gives RBI room to hold rates

Mumbai: A sudden slump in India’s vegetable prices following a spike in farm production will keep the central bank from tightening policy until the end of the year, analysts say, with inflation now tipped to slow more than originally forecast.

The timely fall in vegetable prices is likely to lead the Reserve Bank of India to temper the tone of its monetary policy statement, which is due on 5 April and also give the central bank more room to hold off raising interest rates.

The impact of the crash in prices of vegetables, including onions, tomatoes, cauliflower, cabbages, is expected to last at least until June, which in turn will lead to inflation undershooting RBI’s projection of 5.1-5.6% for April-September.

While that is good news for those looking for a moderation in price pressures, it is likely to have an adverse impact on India’s farmers.

“I have two choices: either to feed (the cauliflowers) to cattle or sell at cheap price in the market. I am choosing the second option,” Mukesh Mali a 30-year old farmer said after cauliflower prices crashed to 3 rupees ($0.05) per kilogram from 12 rupees in December.

The fall in cauliflower prices and a similar slump in other vegetables prices - including a 43% fall in onion prices - pulled the inflation rate down to a four-month low of 4.44% in February, well below expectations of 4.8%.

Early results from a Reuters poll show most analysts expect the RBI to hold policy next week with some pushing back their rate hike expectations until later this year.

The RBI has promised to be tough on inflation, but it has also been mindful of an economy that grew 7.2% in October-December, the fastest in five quarters but still below the 8% expansion seen necessary to hit full employment.

That has led the central bank to keep its policy rate at 6.00% since a 25 basis points cut in August.

“I expect RBI to stay cautious, monitor the developments carefully and get into a longer pause before any concrete signals emerge on the growth front,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.

Still, not all analysts are convinced the RBI will hold rates.

Food inflation has long been volatile in India, a country where farming is still carried out by small households, making supply uneven and unpredictable.

Moreover, food prices could again spike should the government set higher minimum purchase prices for key staples such as wheat and rice at its annual assessment in June as the government seeks rural support ahead of elections due by May 2019.

Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership, says he has not yet changed his prediction for the RBI to raise rates in August.

“The elephant in the room is minimum support price hike,” he said, predicting high prices could boost inflation by 50-100 basis points by the winter, potentially forcing the RBI into a pre-emptive hike. Reuters