Forget RBI rate cuts till April 2020 thanks to high onion prices

The government has released the retail inflation numbers for the month of November 2019. The Consumer Price Inflation (CPI) stands at 5.54% which is highest in the last 40 months. Back in July 2016, the CPI had reached 6.07%. The spike in retail inflation is attributed to the rise in "vegetable" prices, especially onion rates. Vegetables have a weightage of 6.04% in the CPI.

The growing inflation is likely to affect RBI's future monetary policy and stop the central bank from offering further rate cuts. The Reserve Bank of India (RBI) in its Monetary Policy Committee (MPC) meeting held earlier this month had chose not to reduce its repo rate saying the banks are yet to pass the benefit of previous rate cuts to consumers. The RBI said that they have the space to cut repo rate further.

However, with retail inflation rising for the last four months, the RBI may find it difficult to cut rates going foward. "Given that inflation will stay elevated in the next couple of months at close to at least 5.3%-5.4%, a February cut is ruled out at least logically. By the same logic, an April cut looks difficult. Thus, it might be a longer pause," a SBI research team report has said.

As onion prices continue to remain high in December, CPI figures run the risk of breaching RBI's maximum inflation threshold limit of 6 per cent. Currently, onion prices are around Rs 100 in many parts of the country. The prices are unlikely to go down until the end of December.

The government has made import orders for over 33,750 metric tonnes (MT) of onions, which includes 6,090 MT from Egypt and 15,000 MT from Turkey. However, majority of these imports are unlikely to hit the market until January. The SBI report also anticipates onion prices to be normal by end of January. So, the possibility of vegetable prices, pulled by unreasonably high onion rates, may once again flare up CPI figures in the month of December.

"The average mandi prices of onion has increased 223% during Nov'19 over May'19, when the onion retail prices has increased. The jump in onion prices has been attributed to a 26% decline in domestic crop production during kharif and late-kharif seasons because of late monsoon. Excess rains in major onion-producing states such as Maharashtra and Karnataka faced massive crop damage," the SBI report said.

Earlier in the week, the Minister Of Consumer Affairs, Food and Public Distribution, Ram Vilas Paswan informed the parliament that retail onion prices have spiked by over 400 per cent since March this year. The average retail price of onion on December 3, 2019, was recorded to be Rs 81.9 per kg in comparison to Rs 15.87 per kg in March 2019.

In regions like Panaji in Goa, the retail price of onions was as high as Rs 165 per kilogram. In fact, the average price of onions across 114 cities was over Rs 100 per kg, according to official data. Onion prices started climbing this year in September and have continuously averaged over Rs 100 per kg since November 25.