Tomato price hike to cause substantial increase in inflation: RBI governor

Reserve Bank of India governor Shaktikanta Das cautioned that a substantial increase in headline inflation would occur in the near term led by the recent spike in prices of tomato, cereals and pulses.

"The month of July has witnessed accentuation of food inflation, primarily on account of vegetables. The spike in tomato prices and further increase in prices of cereals and pulses have contributed to this. Consequently, a substantial increase in headline inflation would occur in the near term," Das says while reading the monetary policy statement.

This comes as retail tomato prices in several parts of the country are still hovering above ₹200 per kilogram.

After reaching a low of 4.3% in May, retail inflation rose to 4.8% in June and is expected to surge during July-August led by vegetable prices.

While the vegetable price shock may reverse quickly, possible El Niño weather conditions along with global food prices need to be watched closely against the backdrop of a skewed south-west monsoon so far, says Das.

These developments warrant a heightened vigil on the evolving inflation trajectory, he says, adding that the MPC remains resolute in its commitment to aligning inflation to the 4% target and anchoring inflation expectations.

The monetary policy committee raised its CPI inflation forecast for 2023-24 to 5.4% from 5.1% earlier. The MPC expects retail inflation in Q2 FY24 at 6.2%, Q3 at 5.7% and Q4 at 5.2%. CPI inflation for Q1 FY25 is projected at 5.2%.

"Headline inflation projection for Q2 of 2023-24 has been revised up substantially, primarily due to the price shock from vegetables. Given the likely short-term nature of these shocks, monetary policy can look through high inflation prints caused by such shocks for some time," says Das.

The frequent incidences of recurring food price shocks, however, pose a risk to anchoring inflation expectations, which has been underway since September 2022. The role of continued and timely supply-side interventions assumes criticality in limiting the severity and duration of such shocks, Das says.

Headline inflation is easing unevenly across countries and remains above the target in major economies, according to Das. "While the pace of monetary tightening has been scaled down, policy rates could stay higher for longer. Financial markets, which had been buoyed by expectations of an early end to the cycle of monetary tightening, have turned volatile with sizeable two-way movements in response to recent rating event and incoming data," Das explains.

Going forward, the spike in vegetable prices, led by tomatoes, would exert sizeable upside pressures on the near-term headline inflation trajectory, according to MPC. This jump is, however, likely to correct with fresh market arrivals, the rate-setting panel notes. "There has been significant improvement in the progress of the monsoon and kharif sowing in July; however, the impact of the uneven rainfall distribution warrants careful monitoring," it says.