Steeper Surge in Vegetable Prices Could Push India's Inflation to 5.5% in Q3

A sudden and significant increase in vegetable prices, particularly tomatoes, over the past few weeks may result in India's retail inflation rising to 5.5% in the July-September quarter, according to several economists. The country's inflation had eased to between 4% and 5% in April and May, inching closer to the central bank's 4% target. Data expected to be released on Wednesday is likely to show that inflation remained below 5% in June, partly due to a supportive base. However, economists warn that if the ongoing spike in vegetable prices persists, inflation in July could reach 6%.

Increase in Vegetable Prices and Impact on Businesses

According to Gaura Sen Gupta, an economist at IDFC First Bank, vegetable prices have witnessed a sharp increase, with a consumer price index (CPI)-weighted basis indicating a rise of 34% in July. This follows an 18% increase in June, as reported by the National Horticulture Board. Specifically, tomato prices have surged by 160% month-on-month in the first week of July, as indicated by IDFC First Bank Economic Research data. This surge can be attributed to unseasonal rains and crop damage in certain parts of the country.

The rise in tomato prices has had an impact on businesses as well. Even major fast-food chain McDonald's has decided to temporarily stop using tomatoes due to concerns about both quality and price. This highlights the severity of the situation and its potential impact on various sectors.

Inflation Forecasts

Economists have made predictions regarding the inflation outlook in light of the surge in vegetable prices. Kaushik Das, Deutsche Bank's chief India economist, stated in a note that even if prices begin to cool off, inflation could still reach 5.5% over the period from July to September. This forecast is slightly higher than the 5.2% projected by the Reserve Bank of India. Das emphasized that while tomato prices have already experienced a sharp increase due to weather disruptions, the prices of other food items are also rising, and the cumulative impact may be more pronounced in July than in June.

Nomura's economists expect inflation to average around 5.5% in July and August. While this may not necessitate an immediate interest rate hike, they anticipate that monetary policy will remain tight. Sonal Varma and Aurodeep Nandi, economists at Nomura, emphasized in a recent note that monetary policy is likely to focus more on underlying inflation rather than an outlier. However, a surge in the headline CPI driven by vegetable prices could complicate policy decisions and potentially delay the first rate cut.

RBI Governor's Perspective

Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), has maintained that the recent pause in rate hikes should not be interpreted as a pivot, as the disinflation process is expected to be gradual. This suggests that the RBI will carefully monitor the inflationary pressures caused by the surge in vegetable prices and assess the appropriate monetary policy response.

The unexpected surge in vegetable prices, particularly tomatoes, has raised concerns about India's inflation trajectory. Economists predict that if the surge continues, inflation in July could reach 6%. The impact on businesses, such as McDonald's, highlights the severity of the situation. While some economists expect inflation to average around 5.5% in the coming months, the RBI Governor has emphasized the need for a cautious approach to monetary policy in light of the protracted disinflation process.