Onions Bring Tears to RBI's Rajan as Prices Surge
Comment of the Day

November 19 2013

Commentary by Eoin Treacy

Onions Bring Tears to RBI's Rajan as Prices Surge

This article by Unni Krishnan and Prabhudatta Mishra for Bloomberg may be of interest to subscribers. Here is a section

The RBI has said that it faces an unenviable task of trying to address the slowest economic expansion in a decade while tackling the fastest price gains among the largest emerging markets. Local newspapers have reported scuffles at vegetable markets in eastern India and food inflation is set to dominate state elections being held through Dec. 4. High onion prices were cited for the Bharatiya Janata Party losing a 1998 vote in New Delhi.

°We do not see any scope for rate cuts, said Leif Eskesen, HSBC Holdings Plcs chief economist for India and the Association of Southeast Asian Nations. Underlying inflation pressures are rising. The RBI has to maintain a hawkish stance and stand ready to tighten further, if needed.

Food articles, including fruits, vegetables, milk and eggs, accounted for 47 percent of the increase in the benchmark inflation gauge, the wholesale price index. The measure rose 7 percent in October from a year earlier, compared with 6.48 percent the month before and exceeding the 6.95 percent median estimate of 40 economists surveyed by Bloomberg.

Eoin Treacy's view

Combating inflation has been an intractable task for India not least because so many of the contributing factors are structural rather than monetary. Food price inflation could be moderated by introducing a modern supply chain from farm to table. However, this is no simply task and will require commitment from government to introduce the necessary infrastructure and reform of the retail sector. In the meantime, the RBI has the twin concerns of fortifying the Rupee and maintaining an interest policy which tempers inflation without suppressing growth.

Following a number of interest rate hikes, the Rupee unwound most of its oversold condition and has stabilised near INR 61. It fell from the INR62 region today and will need to sustain a move below INR 61 to indicate a return to Rupee dominance. Against this background, the Nifty Index continues to consolidate its earlier gain, in the region of the historic highs.

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