Can India’s RBI really make onion pakoras cheaper?

If you like tucking into onion pakoras (‘fritters’ to those of you from the West), you might have to curb your enthusiasm because the price of this popular Indian snack just keeps on soaring.

In the year to October, onion prices in India have skyrocketed by 278%, while the retail price of other vegetables soared by 46%, notes this Economist report.

Sizzling vegetable prices are partly the reason why inflation refuses to be tamed in India.

As things stand, the country is facing the twin dilemma of slowing/stagnating growth and rising prices, a phenomenon that economists call ‘stagflation’.

One of two widely-tracked inflation gauges hammered home the point (again) on Monday: The wholesale price index (WPI), jumped in November by 7.5% from a year ago, a 14-month high. In October, the WPI had climbed by 7%.

Food prices, in particular, soared by nearly 20% (19.93%, if you want to be exact), up from the 18% gain in the previous month.

The troubling data confirms the trend in consumer prices: last week, data showed that consumer prices jumped by 11.2% in November from a year earlier, a double-digit gain that was higher than what most economists predicted.

Higher food prices are stoking overall inflation. One day before the data on consumer prices were released, Reserve Bank of India governor Raghuram Rajan noted that the RBI is “very uncomfortable with the current level of inflation…We are aware of the weak economy, but we also have to take into account inflationary pressures,” according to a Bloomberg report.

What he means is, the central bank will hike interests rates again if necessary to curb inflation.

Rajan has raised the benchmark interest rate – the repo rate, the rate at which the central bank lends to commercial banks for overnight/short-term borrowings – twice since he took over as central bank governor in September.

At the central bank’s monetary policy review on December 18, it’s very likely that the RBI governor will hike the benchmark rate by 25 basis points to 8%. (100 basis points make one percentage point.)

Will that cool onion – and other vegetable – prices? No, it won’t.

Inflation in India isn’t primarily demand-led  in the conventional sense, because let’s face it, you can’t force people to eat less food because demand for food is high. And that’s essentially what interest rate hikes do, curb demand for goods and services during times of high demand.

What is happening here, however, is more a supply problem, where the surging prices of vegetables partly find their roots in a parched agricultural sector that is badly in need of reforms and investments.

Agricultural products face a mountain of hurdles as they move from farm to supermarket shelf, including poor storage facilities, a string of middlemen that delay the movement of goods and increase the cost of produce at the retail level, and high wastage levels, as the Economist report notes.

What the government needs to do is invite foreign and local capital to improve a highly protected sector that no doubt requires a complete overhaul.

Increasing interest rates might seem great as a monetary signal to indicate that inflation will not be tolerated, but it is unlikely to do much to reduce vegetable prices.

Of course, inflation would have soared much higher had it not been for earlier interest rate hikes by the RBI (by limiting the ‘pass-through’ effect of high food prices into manufactured products). But there is only so much an RBI governor can do, in the face of reform inaction by the government.

As long as vegetable prices keep soaring, expect inflation to plague the Indian economy. (Onion prices are expected to ease in coming months because of seasonal factors (a new harvest), but that won’t keep a lid on prices forever.)

Sorry to break this, but Mr Rajan isn’t going to make that plate of onion pakoras any cheaper for you.

[Image Credit]

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2 thoughts on “Can India’s RBI really make onion pakoras cheaper?

  1. Pingback: Stock markets are rejoicing, buy why did India’s RBI keep rate hike on hold? | Wall of Money

  2. Pingback: Stock markets are rejoicing, but why did India’s RBI keep rate hike on hold? | Wall of Money

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