Keep an eye on rains and vegetable prices
Any imbalance will dent the central bank’s efforts to curb inflation
Prices of many foodstuffs are surging in India, despite a good start to monsoon rains — an unexpected boon for wholesalers, but a major headache for the central bank and a government hoping for its help to reboot the economy.
Reserve Bank of India Governor Raghuram Rajan has cut interest rates three times this year to boost growth, but he has since warned he will not cut again if poor rains drive up prices and threaten his inflation target. Bond and stock traders in Mumbai have been left compulsively checking weather forecasts.
But in a bustling market in Aurangabad, 330 kilometres east of the financial capital, wholesaler Shaikh Sharif does not need to track the monsoon: he says prices will stay high no matter what the rains do. Standing in a storage room with sacks of produce stacked almost to the ceiling, the 42-year-old is stockpiling garlic and onions, saying unseasonal rainfalls earlier this year and a subsequent heatwave have already hit crops, and farmers won’t be able to immediately make up for the shortfall.
“Vegetable prices will rise despite good monsoon rains due to thin supplies,” he said. “If the monsoon fails, then there will be an even bigger rally in prices.”
Pulses, vegetables and chicken make up 12 per cent of India’s consumer price index. That means significant price rises will pose a major challenge to the RBI, which this year unveiled the country’s first inflation target — keeping consumer price rises between 2 and 6 per cent.
A fall in inflation to well within those levels this year has allowed Rajan to cut interest rates by a total of 75 basis points, including a move this month. He has indicated he will now pause, projecting consumer inflation could rise to about 6 per cent by next January, not too far from the 5 per cent registered in May.
Struggling economy
Economists expect him to stay firm on that stance, though a pause will likely frustrate government and businesses wanting more help for an economy that is struggling on the ground, despite strong official figures.
“This is a new inflation targeting framework which the RBI is trying to implement,” said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai. “If inflation goes out of control they will lose credibility, and this whole framework will come under question.”
Recent data supports the prospect of potential inflation trouble during the monsoon season, which runs from June to September, even as rains have now started to fall in earnest, easing some of the investors’ fears.
Upward trend
6% Projected rise in consumer inflation by January. 5% Consumer inflation figure registered in May.