Even soaring onion prices may not stop RBI from delivering more rate cuts

A more than 200 per cent surge in onion prices is expected to push India’s headline inflation rate to its highest level in more than a year, but is unlikely to keep Asia’s most aggressive rate cutter from further easing monetary policy.

The price-spike is likely to add at least 30 basis points to September’s headline inflation. A Bloomberg survey ahead of a report due later Monday showed consumer prices probably rose 3.8 per cent in September from a year ago -- the highest since July 2018.

Prices of onions, as well as tomatoes, soared in September after heavy monsoon rains damaged crops and reduced supplies. With high prices of the kitchen staples known to have contributed to bringing down past governments, Prime Minister Narendra Modi‘s administration banned onion exports and cracked down on hoarding to keep a lid on costs.

Economists see no such threat to the central bank’s accommodative monetary policy stance, which paved the way for 135 basis points of easing so far this year to spur economic growth. Surplus rainfall suggests a record summer harvest is likely, and that should keep food inflation low in the year ahead, according to Bloomberg Economics’ Abhishek Gupta.

Cost of onions rose to as high as Rs 80 ($1.13) a kilogram in September from Rs 20 to Rs 25 the previous two months. Tomato prices in New Delhi have more than doubled to Rsd 60 to Rs 70 per kilogram in the past weeks.

“Consequently, we expect the spike in onion prices to contribute about 30 basis points to headline inflation,” said Teresa John, an economist at Nirmal Bang Equities Pvt. in Mumbai.