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Respite for RBI – interest rates seen staying low as vegetable prices begin to cool

Economists see declining food prices — which account for 54% of the consumer price basket — helping ease price gains from November onward.

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New Delhi: Sizzling vegetable prices in India that have kept inflation high are beginning to cool, helping price growth return toward the central bank’s target band and allowing policy makers to keep interest rates lower for longer.

The wholesale price for staples such as onions was 29 rupees (39 cents) a kilogram in New Delhi on Tuesday, down 29% from Nov. 1, while the price of tomatoes fell about 11%, according to the department of consumer affairs. Potatoes dropped 1.7% to 29.5 rupees during the same period, it said.

With fresh crops arriving at wholesale markets, including in New Delhi’s Azadpur Mandi, one of Asia’s biggest fruit and vegetable markets, the prices are expected to decline further in coming days, according to Rajinder Sharma, a trader whose family has been trading in potatoes and onions for more than a century.

While data later Thursday is expected to show retail inflation was still sticky at 7.3% in October, economists see declining food prices — which account for 54% of the consumer price basket — helping ease price gains from November onward.

“The slowdown in food price gains is likely to become more evident starting in December on account of a high year-earlier base and an expected record harvest of the summer crop,” said Bloomberg Economics’ Abhishek Gupta.

The easing prices may not be enough yet to nudge the central bank’s Monetary Policy Committee to resume interest-rate cuts to support an economy headed for its deepest annual contraction this financial year. But it is just what’s needed to move the inflation trajectory toward the Reserve Bank of India’s 2%-6% target band.

The central bank, which is scheduled to announce its next rate decision on Dec. 4, is forecasting inflation to ease to 5.4% in the current quarter, and slow to 4.5% in the three months to March. Economists expect policy makers to continue with their lower rates-for-longer stance adopted at their last meeting in October.

“We expect another pause from the RBI” next month, said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai. “The recent uptick in high frequency indicators and an improved GDP reading in the fiscal second-quarter will provide some comfort to the RBI.”-Bloomberg

Also read: Rupee may return to near pre-Covid level of 72 by March, Nomura says


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