RBI mostly refrained from acting on high tomato, veg prices: Report

“Potato prices increase after every two years and onion prices rise after every 2.5 years. A vegetable price shock is thus not new to India,”the report said. “We analyzed about 12 episodes of vegetable price fluctuation since FY2010. These price spikes fizzle out within a few months, though duration of each cycle differs ranging from 61 days in 2010-11 to 142 days in 2016-17 (both in tomatoes),” said Aastha Gudwani, India Economist, BofAS India.

A recent RBI paper said that tomato prices increase almost every June-July.

When enlisted RBI’s policy response in each of these episodes, it was observed that the RBI has mostly refrained from acting on such events, given its seasonal nature, the report said. As many as 6 out of 12 times, the RBI has kept the policy rate unchanged even in the face of record high food inflation. “Twice they reduced the repo rate by 25 bps (including the 2019 onion price peak) and only four out of 11 times the RBI increased the repo rate, the report said.

Although its (tomato) weight in CPI inflation is only 0.6, this increase is likely to add 120 bps to headline. Tomato, onion and potato together account for only 2.2% of headline CPI inflation but contribute nearly 50% to the variance in headline inflation, the report said.

The usual drivers of such spikes are – deficient or excess rainfall, heatwaves or strikes in mandi, speculation and hoarding. Since the demand for them is relatively inelastic, inflation becomes a serious problem.

According to the RBI ‘State of the economy’ report, the recent spike in tomato prices on account of crop damage due to inclement weather and pest attacks in the major production belts has received widespread attention as it has taken a toll on households’ budgets. “Historically, tomato prices have been an important contributor to volatility in overall inflation. Its volatility also gets transmitted to prices of other vegetables in both retail and wholesale markets,” the RBI said.

“Tomato, being a highly perishable item with a very short crop duration, exhibits considerable seasonal variation in prices but these episodes are short lived,” the RBI said. “The average duration of a high price episode, derived from the Markov Chain transition probability matrix, shows that prices stay above Rs 40 for an average duration of 2.6 fortnights whereas prices remain below Rs 20 for an average duration of 10 fortnights,” the RBI said.