Onion prices sting RBI ahead of policy review, inflation in focus

The aroma of frying onions from the Britannia and Co restaurant might not penetrate the office of Reserve Bank of India's (RBI) governor Raghuram Rajan a block away, but like the eatery's customers, he can't escape the soaring price of the pungent vegetable.

The price of onions has added to Rajan's already full plate as the new head of RBI wrestles over how to help stabilise the rupee currency and tackle inflation without further dampening economic growth.

A former IMF chief economist, Rajan took over at the RBI on September 4 in the middle of India's worst economic crisis in 20 years. He will announce his first monetary policy review on Friday.

Bankers and industry have continued to pitch for lowering of rate and easing of liquidity ahead of the mid-quarter review of the monetary policy for 2013-14.

"We have made our recommendations for releasing the liquidity, making it more accessible, making it less expensive," State Bank of India (SBI) Chairman Pratip Chaudhuri said. "We have recommended a cut CRR, repo rate and asked RBI not to restrict the MSF to a particular number. Whatever excess SLR banks hold that should be available for MSF (marginal standing facility)," he said.

Other experts, however, are of the opinion that Rajan will maintain status quo in view of rising inflation.

"I do not expect any change in the key interest rate tomorrow," said D K Joshi, chief economist at credit rating agency Crisil.

Indian Overseas Bank Chairman and Managing Director M Narendra said: "It is our wish that RBI reverses liquidity tightening measures taken recently so that loans become cheaper."

With peak festival season around the corner, demand for loans is expected to go up and banks would be able to disburse loans at the lower rate if RBI cuts rate, Narendra said.

A report today by Bank of America Merill Lynch said: "We expect a relaxation in Liquidity Adjustment Facility (LAF) limit to 1 per cent from the current 0.5 per cent."

The US Federal Reserve's surprise decision on Wednesday not to wind down its massive monetary stimulus just yet helped the rupee to a one-month high on Thursday, so inflation may have now moved up on his list of priorities.

In August, the cost of onions was 245 per cent higher than a year earlier, while other vegetables shot up 77 per cent, driving headline inflation to a six-month high. Onion prices have risen even further in September, prompting the government to take steps to limit exports.

Onions play a prominent role in Indian cuisine and public anger rises quickly whenever prices spike.

PRICE PINCH

In reality there is little Rajan can do to prevent the volatility.

Erratic prices for perishable goods are routine in India, partly because the majority of farms depend on the variable monsoon for rains. This year, a drought followed by too-heavy rain affected supplies.

Consumers are also hostage to inadequate storage facilities and transport bottlenecks - that together cause up to 30 per cent of fresh produce to rot before it reaches the market - and a distribution network in which many layers of middlemen take cuts, forcing prices higher.

Whatever the causes, onion prices have political consequences in India - in the 1998 New Delhi elections the Bharatiya Janata Party (BJP) was booted out of office by the Congress party after prices touched Rs 60 per kilo.

The significance will not be lost on Prime Minister Manmohan Singh, whose Congress party faces national elections by May. The Congress party local government in Delhi and its rivals the BJP have been trying to out-do each other selling the vegetable at below market rates from the back of trucks in the city.

Discount site Groupon offered onions at 9 rupees per kilogram earlier this month, a discount of as much as 90 per cent, advertising the deal with the image of an onion in a jewellery case. Demand was so high its site crashed.

But Rajan, who had a lucky break on Wednesday when the US Fed decided not to reduce the flow of cheap dollars that help drive investment flows to emerging markets such as India, might soon be in for another reprieve.

Strong rains in the current monsoon season mean some are predicting a bumper onion crop this year - and farmers are forecasting prices will drop sharply over the next few weeks.

"Onion prices to ease in 2-3 weeks as fresh output arrives from Maharashtra, other states," agriculture minister Sharad Pawar posted on Twitter on Thursday.