Vegetables drive high retail inflation

Moderation in rate of rise possible but the first outcome could be a rise in bank rates

With an average 57.75 per cent spurt in prices, vegetables were the highest contributor to November’s rise, the third in a row of monthly increase, in the consumer prices index (CPI).

In this segment, onion, potato, tomato, green and leafy vegetables reported a dramatic spurt of a little over 100 per cent.

The CPI has a 5.44 per cent weightage of vegetables; it accelerated to an all-time high of 14.72 per cent in November, as compared to 10.1 per cent in October and 9.8 per cent in September.

The spurt in vegetables was followed by a 18.38 per cent average price rise in fruits and 14.9 per cent in the retail realisation of food and beverages (F&B). With a weightage of a little less than half, at 49.71 per cent, F&B posted a 14.9 per cent rise in averages prices in November, as compared to 12.6 per cent in October and 11.4 per cent in September. The Reserve Bank of India (RBI) is monitoring the CPI variations before taking a decision on the repo rate in its mid-quarter policy review, due to be announced the coming Wednesday.

“Rising food prices have been the chief contributory factor pushing the overall CPI to such high levels. With the food inflation seen to be unrelenting, the WPI (wholesale price index) inflation for the month  likely to stay elevated, too. The sticky inflation scenario would be a guiding factor for RBI in formulating its monetary policy,” said Madan Sabnavis, chief economist, CARE Ratings.

Retail inflation as measured by the CPI for November was considerably above the market expectation of 10 per cent over the corresponding period last year. It is at its highest level since the index was constituted in January 2011. This indicates a resurfacing of inflation worries, despite hope of a respite due to a favourable monsoon and consequently improved agricultural prospects. In fact, vegetable prices have seen some moderation since November.

“We expect, CPI to moderate in the coming months. But, it would not offer unexpected relief from high prices of protein-related food articles. We hope the CPI to average between nine and 10 per cent this year,” said D K Joshi, chief economist (agri commodities), CRISIL.

With CPI inflation high and surpassing the expectation, and given RBI’s oft-stated goal of reining this in, at the cost of growth if needed, yet another rise in the repo rate is possible. From an earlier expectation of a 0.25 per cent rate cut, the sustained CPI rise might impel RBI into a 0.25-0.50 rise in repo, said a CARE Ratings report.