India’s ‘TOP’ vegetables could spoil its disinflation party

India's statistics ministry will release CPI inflation figure for June on July 12.

India’s consumer price index (CPI) inflation for June, though mostly expected to hold steady or even ease versus the month before, may see a spike in vegetable prices that can curtail the disinflation journey.

This especially given the recent increase in the prices of key ‘TOP’ vegetables comprising tomato, onion and potato.

Even as Barclays sees retail inflation moderating to 4.6 percent last month, it flags that a surge in vegetable prices is likely to limit the fall in the headline figure.

India’s headline retail inflation eased to the lowest in a year at 4.75 percent in May 2024. And while food and beverages costs remained the same at 7.87 percent sequentially, prices of vegetables declined marginally to 27.33 percent versus 27.80 in April.

But in June, Barclays anticipates an uptick in vegetable inflation on a month-on-month basis, adding that while prices typically rise in summer, the magnitude of the rise during the season has inched up in the last couple of years, “possibly reflective of the changing weather patterns -- increased frequency of heatwaves in May and June this year, followed by delayed monsoon progress in the vegetable-production hub in the northwest in second half of the month.”

India Ratings too anticipates retail inflation moderating to a 13-month low of 4.5 percent in June, primarily due to a favourable base effect but at the same time the agency warns of the impact of higher prices of food items such as onion and potato.

On the other hand, Emkay Global’s Madhavi Arora expects the headline rate to have risen to 4.87 percent in June majorly driven by higher food prices, specifically vegetables, due to the delayed monsoon, despite a favourable base effect potentially containing the pace of increase.

Data from department of consumer affairs shows that prices of key vegetables has seen a spike during the last month. While the average retail cost for a kilogram of potatoes rose 13 percent on June 30 versus the last day of May, cost of onions increased by a larger 26 percent.

The steepest spike was seen in tomatoes, a kilogram of which cost nearly 49 percent more during the last day of June compared to May 31.

Arora added, prices for most vegetables have been rising in recent weeks, especially onions, tomatoes and potatoes, due to supply disruptions -- first due to the delayed monsoon, and now due to heavy rainfall across the country that has damaged crops and caused supply bottlenecks.

“With fresh supply of tomatoes only hitting the market from August onwards, it is likely that prices will stay elevated unless govt intervenes by selling below market prices, as it did for onions and tomatoes last year,” she said.

However, going ahead with rain regaining momentum into July, vegetable prices are expected to moderate, benefiting from the crop’s short growth cycle, according to Radhika Rao, senior economist at DBS Bank.

Limited fall in India’s headline retail inflation due to sticky food prices is significant at a time when the Reserve Bank of India (RBI) has signalled that a cut in the interest rate would follow only once signs of durable disinflation emerge.

The RBI’s monthly bulletin on June 19 said the goal of aligning inflation with the target of 4 percent will remain a work in progress as long as food prices pressure persists.

And, then on July 11, central bank Governor Shaktikanta Das in an interview to CNBC-TV18 said it was too early to talk on the interest rate cut due to uncertain economic environment and inflation remaining close to 5 percent.

To be sure, the 12-month low retail inflation in May came despite little change in food prices that remained elevated at 7.9 percent.

Barclays says that while CPI inflation is likely to print below 4 percent in Q3 of the current fiscal, the central bank likely will want to see signs that headline inflation is aligning durably with the target from Q4 onwards. Therefore, the RBI is likely to stay on hold in the near term, monitoring the monsoon and international commodity prices (particularly energy).

“We see a window for rate cut opening in December, though note the risk of a delay if inflation does not progress as per the RBI's expectations or growth conditions remain favourable,” it said.