Rising onion prices are anticipated to have a limited impact on inflation in October but may contribute to a surge in inflation, nearing the 6% mark, in the coming months, according to economists.
In the first week of November, onion prices saw a sharp increase of nearly 75% compared to the previous month.
Economists, including Sonal Varma and Aurodeep Nandi from Nomura, predict that due to the rise in vegetable prices, Consumer Price Index (CPI) inflation is expected to reach 5.3% year-on-year, up from 5.0% in September. They anticipate headline inflation to reach around 6% in November and December, before stabilizing in the following year.
Although the decrease in tomato prices might help in controlling inflation in October, experts suggest that the situation might worsen in the future.
Gaura Sengupta, an economist at IDFC First Bank, mentioned that data from the National Horticulture Board indicates a 10.9% month-on-month increase in onion prices in October, partially offset by a 9.3% decline in tomato prices. Overall, vegetable prices, based on the CPI-weighted average, show a slight positive increase on a month-on-month basis.
Onions account for 0.64% of the retail inflation basket, while tomatoes have a lower weight of 0.57%.
Madan Sabnavis, Chief Economist at Bank of Baroda, estimated that retail prices have risen by 30-40% year-on-year, potentially impacting inflation by approximately 0.19-0.24% in October.
However, economists believe that a recurrence of the situation witnessed in July-August, when inflation surpassed the Reserve Bank of India’s upper band target of 6%, is unlikely.
The spike in onion prices is attributed to irregular monsoon patterns affecting arrivals in September and October. Nevertheless, the disruption in supply is not as severe as seen in the case of tomatoes. Historically, onion prices tend to rise in October and November, followed by a decline in December or January, according to Sengupta.
The government has taken measures to address the issue, such as imposing export duties on onions, setting minimum export prices, and releasing buffer stocks. Despite these efforts, prices are yet to stabilize, as noted by economists from Nomura.
Although other food prices have decreased, food inflation averaged 6.6% in September. The stress caused by rising onion prices is expected to keep food prices elevated.
The government is scheduled to release the October inflation data on November 13.