RBI Governor Shaktikanta Das categorically stated in the minutes of the last Monetary Policy Committee meeting that it is risky to reduce the repo rate as inflation is still not at a comfortable level of 4 per cent. September inflation, measured by the Consumer Price Index, surged to 5.5 per cent, while food inflation, affecting the largest population segment, crossed 9.2 per cent. Hence, RBI’s uneasiness in committing to reduce the repo rate is understandable.
A bigger question is how far can the RBI really tame inflation, especially when it is driven by food, and within that, largely by vegetables. Vegetable inflation is 36 per cent and their overall contribution to CPI inflation is 42.8 per cent. The top 10 commodities that contributed most to CPI inflation in September are all vegetables. No wonder, vegetables have put RBI in a bind.
To be fair to the RBI, let us see its record in taming inflation since it adopted the flexible inflation targeting (FIT) framework, with a target of 4 per cent +/- 2 per cent. Our analysis of 101 months shows that CPI inflation exceeded the 4 per cent target 72 per cent of the time, and in 28 per cent of the cases, it surpassed the upper threshold of 6 per cent (Figure 1).
Why inflation on prices of tomatoes, onions, and potatoes particularly remains a pain point for RBI
Various factors have impacted CPI inflation during this period. These have ranged from plunging international prices, especially of crude and food, to reducing the fiscal deficit in the early years of this period (2016 to 2019) when inflation was tamed below 4 per cent. After that, disruptions in supply chains during Covid-19, and the Russia-Ukraine conflict in 2022, pushed up global as well as domestic inflation.
The outsize influence of CFPI on overall CPI inflation boils down to the outdated weights assigned to food and beverages in the CPI basket. Currently, they account for 45.9 per cent of the CPI, with food alone making up 39 per cent, based on a 2011-12 consumption survey. It is high time these weights are updated, based on the 2022-23 consumption survey. The RBI still deserves credit for maintaining inflation at levels lower than in many emerging markets and developing economies (EMDEs). According to IMF data, in 2024, India’s inflation stood at 4.4 per cent, well below the EMDE’s average of 7.9 per cent. But the greater the proportion of food in overall CPI, the harder it becomes for monetary policy alone to control inflation. So, replacing old food weights in CPI with new ones, which are likely to be about 5-6 percentage points less, should be a priority to reflect the reality better.
Let us dive deeper into current food inflation. The recent surge in vegetable inflation, particularly driven by tomatoes, onions, and potatoes (TOP), is a direct manifestation of structural weaknesses in India’s agricultural supply chains, compounded by adverse climatic conditions. In September 2024, vegetable inflation contributed a staggering 63 per cent to the food inflation (CFPI), with year-on-year price increases of 42.4 per cent for tomatoes, 66.2 per cent for onions, and 65.3 per cent for potatoes. These figures are not merely anomalies, they are symptomatic of deeper inefficiencies and vulnerabilities in their value chains that demand urgent policy attention.
Tomatoes follow the classic “cobweb model” of price cycles, where short supply quickly pushes up prices due to their perishable nature. Current prices of Rs 60-80/kg stem from delayed kharif arrivals due to heavy rains in Karnataka and Andhra Pradesh. Karnataka’s key production belts — Chikkaballapur and Kolar — suffered a 20-30 per cent yield loss from white fly infestations, worsening the supply shortage and fuelling food inflation.
Onion retail prices, currently between Rs 50-60/kg, highlight severe supply disruptions. Among the three growing seasons, only the rabi crop can be stored from March to October, serving as a buffer during lean months. This year, onion storage is slightly lower than last year, with Maharashtra reporting 1.3 LMT storage loss. Incessant rainfall in Maharashtra, Karnataka, Telangana, and Andhra Pradesh has damaged the kharif crop, delaying arrivals and tightening supply.
Stored stocks of potatoes get released from May to November in which October sees the largest release as the rabi potato starts to perish by that month. The lower arrival to mandis has resulted in a spike in prices. Part of this surge can be attributed to the low base effect from the previous year.
India’s recurring price volatility in TOP crops demands a more resilient agricultural policy. While Operation Greens launched in 2018 aimed to stabilise prices by streamlining value chains, its expansion to cover all fruits and vegetables diluted its original focus. As a result, supply disruptions and significant post-harvest losses — 18-26 per cent for potatoes, 25 per cent for onions, and 11.6 per cent for tomatoes — continue to drive up retail prices. Such losses should not be taken lightly, after all, a spike in onion prices in the 1998 elections caused the Vajpayee government to collapse.
Short-term measures like the recent 40 per cent export duty on onions reveal the government’s consumer bias and knee-jerk reactions. The solution lies in processing a portion of TOP crops during surplus periods: Converting at least 10 to 15 per cent of tomato production into paste and puree and dehydrating onion into products like flakes and powder. Successful models like Jain Irrigation’s onion dehydration partnership with farmers, demonstrate how such initiatives can reduce wastage and boost farmers’ income.
What’s truly needed is a dedicated agency, staffed with experts focused exclusively on tomatoes, onions, and potatoes. Without such specialised oversight and long-term strategies, RBI will remain in a bind on the repo rate. It needs to press for these long-term strategies with the government as this goes beyond its jurisdiction. Only then can it heave a sigh of relief from veggie inflation.
Gulati is distinguished professor, Chanda is research assistant and Roy is a senior fellow at ICRIER. Views are personal
