Soaring tomato prices may sour RBI’s inflation forecast

The recent increase in tomato prices could jeopardise the headline inflation forecast, according to a study by Reserve Bank of India’s Development Research Group, which suggested better supply management to ensure price stability.

Despite making up only a small portion of the Consumer Price Index Combined (CPI-C) basket, tomato, onion and potato are major contributors to the volatility of headline inflation, the group said.

Tomato prices have spiked across the country, even as onion and potato have remained stable.

“Given the perishable nature, limited substitutability, and increased susceptibility to supply shocks, vegetable prices have historically tended to be highly volatile, imparting volatility to the overall inflation,” the group stated.

The RBI had in its June policy projected CPI inflation to be 5.1% in FY24, with the quarterly forecasts at 4.6% (Q1), 5.2% (Q2), 5.4% (Q3) and 5.2% (Q4).

Investigating how volatility transmission took place in daily prices of tomato, potato and onion for the period from January 2011 to March 2021, the study group said fluctuation of the prices was generally due to common supply shocks which included unseasonal rains to hoarding of the commodity.
“As volatility in vegetable prices is driven by recurrent supply shocks, supply management measures by the government, such as strengthening the supply chain, placing stock holding limits on traders, wholesalers and retailers, developing cold storages, reducing post-harvest losses and integrating all the participants in the value chain can help in ensuring domestic availability and stable prices,” the group said in the study, named ‘Anatomy of Price Volatility Transmission in Indian Vegetables Markets’.The group comprised Indian Institute of Technology-Bombay associate professor Puja Padhi, and Himani Shekhar and Akanksha Handa, both managers at RBI’s Department of Economic and Policy Research.

The RBI said the views expressed in the study were of the authors.

“The findings of the study hold implications for the management of overall inflation. Given the objective of price stability of the central bank, it becomes imperative to not just anchor inflation within targeted levels but also sustain inflation at those levels,” the authors said. “This would require curtailing the primary sources of volatility.”

Volatility in the key vegetable prices may generally be high due to their high perishability and vulnerability to weather-related disturbances on the back of relatively less elastic demand as these are key vegetables for Indian households, they added.