Rapid increase in vegetable prices can push headline CPI-inflation for July much higher at 7.5%

(Photo: IANS/Kuntal Chakrabarty)

Sanjeev Sharma

New Delhi, Aug 8 (IANS) Apart from tomatoes, prices of green chili, ginger, and garlic (G3) have also more than doubled in YoY terms in July’23.

The combined weight of G3 vegetables is 0.78 per cent in the CPI basket.

Brinjal, another vegetable with a weight of 0.37 per cent, was up 48 per cent YoY last month and peas (weight = 0.1 per cent) has seen a price rise of more than two-thirds in July’23 vis-a-vis a year ago, Motilal Oswal Financial Services said in a report.

In other words, the surge in prices was not limited to tomatoes last month. A wider sample of vegetables, with a total weight of 4.4 per cent (double of TOP and accounting for more than two-thirds of all vegetables in CPI), suggests that the price index of all vegetables may have increased 50 per cent YoY (and 50 per cent MoM) in July’23, the report said.

With a weight of 0.57 per cent in CPI, a tripling of tomato prices will add more than a percentage point to India’s headline CPI-inflation in July’23.

“This is widely known, and thus, the inflation forecasts have been revised accordingly. However, what could come as a surprise to the market participants is if the headline inflation exceeds 7 per cent YoY in July’23,” the report said.

This data is scheduled to be published next Monday  (August 14). And we reckon that the headline inflation could be 7.5-8 per cent YoY in July’23, compared to 4.8 per cent YoY in June’23. The primary reason why inflation could potentially be much higher than the revised forecasts is the rapid increase in prices of various other vegetables, the report said.

Usually, tomato, onion, and potato (called TOP) are the three key vegetables, for which daily prices are tracked very closely. The combined weight of the three vegetables is 2.2 per cent, which is more than a third of all vegetables with a weight of 6 per cent in the CPI basket. During normal scenario, it is sufficient to look at the TOP and make a view on the inflation trajectory in vegetables. This, however, is not normal times, the report said.

“If the headline inflation comes in at 7.5 per cent or higher, we believe there could be some knee-jerk reaction in the financial markets, creating noise about another rate hike by the Reserve Bank of India (RBI). We, nonetheless, do not expect any monetary action,” it said.

Overall, vegetables could push the headline CPI-inflation for July’23 much higher (at 7.5 per cent or higher) than what the upwardly revised forecasts suggest (6.5 per cent – 7 per cent). If so, the fear of another rate hike by the RBI (or further delay in rate cuts) could lead to a sell-off in bonds, leading to higher yields, some pressure on the currency and equities as well. However, we see these reactions as temporary, as the headline inflation is expected to return to below-5 per cent in 3QFY24. The RBI, thus, is expected to look over higher inflation in July-August’23, the report said.

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