Tomato price surge could throw inflation trajectory off balance: RBI study

The surging prices of tomatoes can potentially disrupt India’s inflation trajectory, a study by researchers at the Reserve Bank of India (RBI) said.

According to the report, there is unidirectional volatility transmission from tomato prices to those of onions and potatoes. This means that variations in tomato prices have an impact on the pricing of onions and potatoes.

The findings suggest that knowledge about tomato price fluctuations is passed along to the pricing of the other two vegetables, indicating a certain level of interdependence and information flow between their prices.

The study titled ‘Anatomy of Price Volatility Transmission in Indian Vegetables Market’ was funded by the Reserve Bank of India under the DRG Study Series. Development Research Group (DRG) has been constituted in the RBI in its Department of Economic and Policy Research.

Wholesale tomato prices crossed Rs 150 per kilogram in markets last week. A few weeks ago, tomatoes were being sold at Rs 15 to 20 per kg.

Although tomato, onion, and potato constitute a minor proportion of the Consumer Price Index Combined basket, they significantly contribute to the fluctuation and instability of headline inflation, the report said.

“These vegetables have a significant weight in the food basket, and the volatility in their prices has an impact on the headline inflation,” Sakshi Gupta, principal economist at HDFC Bank said. “For June, the impact might be cushioned because of base effects, but going forward there are upside risks to inflation print, because of volatility in not just vegetables, but also cereals and milk. There is a risk that the number could, depending on the severity of food inflation, edge up around 5.5 percent, and move toward 6 per cent,” Gupta told Business Standard.

Food price inflation experienced a downward trend until 2018-19, mainly due to abundant food grains and horticultural production. However, in subsequent years, food price inflation began to rise, primarily driven by an increase in vegetable prices. This upward trend in prices can be attributed to the growing occurrence of extreme rain events, which have caused significant spikes in onion, tomato, and potato prices. Vegetables, constituting 13.2 per cent of the CPI-Food and beverages basket, have historically played a significant role in driving food inflation. The report said vegetables had been major drivers of both price increases and subsequent moderation in food prices.

In its June monetary policy statement, the domestic rate-setting panel said the future path of headline inflation was expected to be influenced by the dynamics of food prices. Food items hold a substantial weight of approximately 40 percent in the Consumer Price Index basket.

Consumer inflation fell to a 25-month low of 4.25 per cent in May with food inflation declining to an 18-month low of 2.91 per cent.

Consumer inflation averaged 4.5 per cent in April-May.

The RBI has forecast CPI inflation to average 5.1 per cent in 2023-24, 10 basis points lower than its earlier projection, with inflation averaging 4.6 per cent in April-June and 5.2 per cent in July-September. The central bank has projected CPI inflation at 5.4 per cent in October-December and 5.2 per cent in January-March.