How onions stopped RBI from cutting lending rates again

Mumbai: In the minutes of the RBI December monetary policy meeting released earlier, it was amply clear that the members pretty much ran scared of the onion prices which in turn resulted in a sharp increase in retail inflation.

The December policy meeting was the first one headed by Governor Shaktikanta Das wherein RBI paused after an aggressive cut cycle, delivering a total of 135 basis points rate cut since the start of the year.

The sharp rise in onion prices determined the lending rate as it may continue to do so. Economists at Bank of America Securities also said in a note :"We advise investors to track onion prices to time the next rate cut by RBI."

Onion prices are currently as high as Rs 140 in the national capital.

"Headline inflation rose sharply in September and further in October, driven up by a sudden spike in prices of vegetables as kharif crop was damaged due to unseasonal rains in many parts of the country; increase in prices of onion was particularly sharp," RBI Governor Das said in the MPC.

On the rising inflation, member Chetan Ghate said: "Such a sharp increase has not been seen in the past three years...they also may possibly reflect the rise in economic policy uncertainty in the current growth climate."

The MPC decided to continue with the accommodative stance "as long as it is necessary to revive growth while ensuring that inflation remains within the target".

The decision to hold the rates steady "was in consonance with the objective of achieving the medium-term target for consumer price index (CPI) inflation of 4 per cent within a band of +/- 2 per cent, while supporting growth".

However, the members also noted that the inflation is rising in the near-term, but it is likely to moderate below target by Q2 2020-21.