Sustained increase in onion prices could pose a threat to headline retail inflation
For now, subdued core inflation growth will give some comfort to the central bank
Onions are making Indian consumers and their wallets weep. Heavy rainfall in major onion producing states such as Karnataka, Maharashtra and Madhya Pradesh has taken a toll on supply, resulting in sharp price increases.
At an all-India level, average retail onion prices have risen from ₹25/kilogram (kg) in August to ₹35/kg in September so far. Going by media reports, among the worst hit are metros like Mumbai and Delhi where retail onion prices have soared as high as ₹80/kg.
If this price movement sustains, then it will emerge as a threat to the headline retail inflation which has been below the mandated target of 4% and giving comfort to the Reserve Bank of India (RBI). CPI inched up to 3.2% in August from 3.1% in July.
“Onions have an overall weightage of 1.7% in the food inflation basket. So, if we were to assume that onion prices have risen by around 50% on a year-on-year (y-o-y) basis, then that would mean an upswing of 80 basis points (bps) in the food inflation. As for the index of consumer price inflation (CPI), that would translate into an up move of 30bps," said Suvodeep Rakshit, senior economist, Kotak Institutional Equities Ltd. One basis point is one hundredth of a percentage point.
According to Anagha Deodhar, an economist at ICICI Securities Ltd, so far in September, wholesale onion prices have increased by 89% from a year ago.
“If all-India retail average onion prices stays at ₹35/kg for the rest of FY20, CPI inflation could inch up to 4.2% in Q3 and 4.5% in Q4FY20. For every additional ₹5/kg increase in onion prices, average CPI inflation in Q3 and Q4 could be higher by 20bps. Full-year inflation could inch up to 3.75%. For every additional ₹5/kg increase in onion prices, headline inflation could be higher by 5bps," she said.
The threat to headline inflation is there. But economists believe that the RBI is not in a tough spot in the near term at least. While economists are watching the trend in onion prices, they expect the central bank to cut policy rates and keep the stance accommodative in the October policy. The comfort is food inflation may have inched up slightly in August, but core inflation (excluding food and fuel) continued to move lower.
Meanwhile, expectations are that the buffer stock of onions would contain the up move. The Centre has a buffer stock of 56,000 tonnes of onion, of which 16,000 tonnes have been offloaded so far, reported news agency PTI.
“Spike in onion prices appears to be partly seasonal, driven by delayed supplies due to weather conditions and lower production versus last year. Efforts to boost domestic supply through the national agency’s stocks are ongoing, which together with the imposition of minimum export price restrictions should help quell prices after the seasonal and festive demand ebbs," said Radhika Rao, senior vice president and economist, DBS Bank.