Banking Central | A letter from humble Tomato to the RBI Governor

Tomato prices have surged in the recent months.

Dearest RBI Governor,

You must be busy thrashing out the rate decision for the next two months with the members geared up for the Monetary Policy Committee (MPC) meet starting August 8. I know how you all are cheesed off with inflation as prices have gone through the roof over the last couple of months.

My sympathies! I know how the members of the rate-setting panel are losing sleep over simmering veggies. More than my relatives, friends and distant cousins of different flavours and hues, I have been the eye of the storm in this whole fiasco. From being the hot tomato, I am now the rotten tomato for every dish.

But, it's not entirely my fault, dear Governor. At some places, I was scorched in the blazing sun with no rain for days, while I was drowned for days in too much rain somewhere else. In some areas, I was bugged by pests. And, all these eventually led to a supply crunch in the markets. My short shelf-life too adds to the supply woes.

I know I have gone 300 percent hotter in the last couple of months, claiming Rs 250 a kilo in the retail market. But that's the demand I command in the market, although I have gone under way at Big Mac and Subway and laid off the dining tables in middle-class homes. I have a big grin, I must admit. My real worth has finally unleashed.

But, it is unfair to blame me alone for the entire jeopardy. Look at my

friends like Tur, Urad and Moong. What about the cereals getting hotter by the day? If Tur has a steep 32 percent higher price tag, Urad and Moong aren’t far behind. Even rice is boiling 12.97 percent up over last year. Spices too have joined the basket with most fruits and grains.

I know how food bills are burning a bigger hole in the pocket, with food inflation surging to 4.49 percent in June from 2.96 percent a month before, pushing the headline retail inflation for the last month to 4.81 percent, from 4.31 percent in May.

And, it’s me who gets the bad press, for everything this time!

After the most unpleasant phase of your failure to cool off inflation from simmering beyond your tolerance level of 6 percent for three consecutive quarters, and zeroing in on inflation like Arjuna aiming at the eye of the fish, it's obvious that you would be extra cautious in your August deliberations.

Dear Governor, I am curious to know how the MPC can dish out the most potent recipe to cool off the food prices. The RBI has only limited tools in its arsenal to control inflation. You can only control the demand by making money costlier by tweaking interest rates or managing systemic liquidity, whereas the current price rise isn’t a demand-driven one but one triggered by supply constraints. What else can you do here? I have my doubts.

I also fail to understand why the monetary policy stance remains ‘withdrawal from accommodation’ whereas as your colleague Jayanth Varma in the MPC panel has repeatedly highlighted that a large part of the policy withdrawal is already in effect. If the idea is to convey the continued anti-inflation stance of the RBI to the market, then doesn't the MPC shift its stance to ‘neutral’ or ‘tight’ as you deem fit. Can’t the communication on the stance be a bit clearer?

Third, the repo rate is up by 250 basis points since May 2022. Isn't it too much for too long? Tightening of the monetary policy, after all, takes a toll on economic growth. In India, the economic recovery is still wobbly, and higher interest rates high for a longer period may impact consumer sentiment and reducing their purchasing power.

I know there is a trade-off between inflation and growth. We, back in our vegetable baskets, keep discussing among friends how the monetary policy is constrained to act when inflation is supply-driven. Also, too much tightening, as economists warn, can backfire on the nascent recovery.

I know that no matter how red-hot I get, there are red eyes of the El Niño and market blues outside India acting in sync to keep us costlier.

I’m fairly certain that you will announce a status quo in the policy rates this week and repeat the caution on price pressure. I wish you good luck for the next policy review and sincerely hope things turn in your favour soon. No hard feelings, please!

By the way, will look forward to finding a mention in your policy speech this time.

Wishing you the best,

Tomato, your humble friend

Banking Central is a weekly column that keeps a close watch and connects the dots about the sector's most important events for readers.