Vegetable price declines give India's central bank room to hold interest rates

Published: March 28, 2018 13:18:49 | Updated: March 30, 2018 11:21:59


- Reuters file photo

A sudden slump in India’s vegetable prices following a spike in farm production will keep the central bank from tightening policy until the end of the year, analysts say, with inflation now tipped to slow more than originally forecast.

The timely fall in vegetable prices is likely to lead the Reserve Bank of India to temper the tone of its monetary policy statement, which is due on April 5 and also give the central bank more room to hold off raising interest rates, reports Reuters.

The impact of the crash in prices of vegetables, including onions, tomatoes, cauliflower, cabbages, is expected to last at least until June, which in turn will lead to inflation undershooting RBI’s projection of 5.1-5.6 per cent for April-September.

While that is good news for those looking for a moderation in price pressures, it is likely to have an adverse impact on India’s farmers.

“I have two choices: either to feed (the cauliflowers) to cattle or sell at cheap price in the market. I am choosing the second option,” Mukesh Mali a 30-year old farmer said after cauliflower prices crashed to 3 rupees ($0.05) per kilogram from 12 rupees in December.

The fall in cauliflower prices and a similar slump in other vegetables prices - including a 43 per cent fall in onion prices - pulled the inflation rate down to a four-month low of 4.44 per cent in February, well below expectations of 4.8 per cent.

Early results from a Reuters poll show most analysts expect the RBI to hold policy next week with some pushing back their rate hike expectations until later this year.

The RBI has promised to be tough on inflation, but it has also been mindful of an economy that grew 7.2 per cent in October-December, the fastest in five quarters but still below the 8 per cent expansion seen necessary to hit full employment.

That has led the central bank to keep its policy rate at 6.00 per cent since a 25 basis points cut in August.

“I expect RBI to stay cautious, monitor the developments carefully and get into a longer pause before any concrete signals emerge on the growth front,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings.

Still, not all analysts are convinced the RBI will hold rates.

Food inflation has long been volatile in India, a country where farming is still carried out by small households, making supply uneven and unpredictable.

Moreover, food prices could again spike should the government set higher minimum purchase prices for key staples such as wheat and rice at its annual assessment in June as the government seeks rural support ahead of elections due by May 2019.

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