It might seem trivial, but the price of onions matters in India. In 1998, the chief minister of Delhi was forced to step down for suggesting that poor people should stop eating onions when prices were too high. Last year, the country took the step of banning exports of the vegetable after heavy rains caused severe crop damage and soaring prices led to a spate of public anger. Politicians will be shedding few tears then, as the latest wholesale price index (WPI) showed the price of onions falling 75% annually.
WPI: Onions from Timetric
This came as January’s wholesale price index moderated more broadly, with prices rising 6.6% on the year, down from 7.5% in December 2011. This was the lowest inflation reading since December 2009.
Inflation in the primary articles category (which comprises mostly food and accounts for around 20% of the overall WPI) eased to 2.3% on an annual basis in January, down from 3.1% reported in December. Food prices fell by 0.5% on an annual basis, the first such decline since April 2004. This was driven by a 21.8% decline in fruit and vegetable prices, as well as the 75.6% plunge in the price of onions.
Inflation in the fuel and power category (accounting for nearly 15% of WPI) remained elevated at 14.2% in January, largely reflecting high international crude oil prices. The increase in prices of manufactured products (accounting for 65% of WPI) moderated to 6.5% in January, down from 7.4% in the previous month, suggesting a slight easing in input costs.
Lower than expected inflation is likely to have brought some relief to the Reserve Bank of India (RBI), which has been struggling to keep prices in check for the past two years. However, the joy may prove short-lived as the downward trend is unlikely to last.
Instead, inflation is expected to stay in a range of 6.5-7.5% in first half of 2012 for a number of reasons. Firstly, the recent annual decline in food prices mainly reflects base effects, which will no longer be apparent in the coming months. Secondly, core inflation is likely to remain stubborn on account of still high input costs. Finally, although recovering ground in January, the rupee will remain weak.
The RBI is still wary of underlying inflationary pressures, and we expect it to wait until April (after the government announces its budget plans) before deciding whether to lower interest rates. However, pressure is building on the RBI to ease its policy stance, and if Q4 GDP growth proves to be particularly slow, the bank might be compelled to cut rates at its next meeting in mid-March.