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The Onion twist to inflation

The price surge in onions dramatically represents the underlying force of inflation.

Published: 16th December 2019 03:28 AM  |   Last Updated: 16th December 2019 12:37 PM   |  A+A-

A vendor selling onions at Swaraj Maidan Rythu Bazaar in Vijayawada on Thursday.

A vendor selling onions at Swaraj Maidan Rythu Bazaar in Vijayawada on Thursday. (Photo | Prasant Madugula/EPS)

Express News Service

Onion prices have often created a flutter in the financial markets through volatile price swings. The extent of the jump in onion prices recently is significant enough for the Reserve Bank of India (RBI) to take note and further flag concerns about the rising inflation in the economy.  

“Prices of onions shot up by 45.3 per cent in September and further by 19.6 per cent in October,” said the latest monetary policy statement of the RBI last week. It has revised the outlook for inflation to over 5 per cent for the second half of the financial year ending March 2020.

It had earlier projected 3.5 per cent for the period in an earlier review. The monetary policy committee of the RBI left rates unchanged. The committee determines the borrowing rates for us by setting the repo rate or the rate at which it lends to commercial banks. If prices of goods and services stay high, there is a good chance that the RBI will not cut borrowing rates any further.

The onion saga

Experts blame the excess monsoon for a sharp rise in prices of food items. The price surge in onions dramatically represents the underlying force of inflation. However, experts also believe that as more supply hits the market from overseas and from the second crop in early 2020, prices of onions and other vegetables would cool off. Every year, India has produced a record output of onions.

In 2018-19, it stood at 23,500 tonnes, a new record, according to a report by CARE Ratings, a credit rating agency. However, the annual output is a total of three harvest seasons. The first harvest of onion takes place in October-December. It accounts for 15 per cent of the yearly production. The second harvest is in January-March (20 per cent output) and the third between March and May, which accounts for 65 per cent. The first harvest has been weak, which has resulted in shortage and high onion prices.

All of it matters to your finances. “Onions have a share of 0.16 per cent in the wholesale price index (WPI) and 0.64 per cent in consumer price index (CPI),” said CARE ratings in a note. A 100 per cent jump in the price of onion can have a material impact on the consumer price inflation that effectively determines our borrowing rates. The growth in the consumer price index determines the borrowing rates you pay for loans or returns that you get on fixed deposits.  

How to make sense of it

A better way to understand the rising inflation trend is to look at equity markets. If equity share prices are staying firm and not losing ground or falling, there is no need to worry. Equity markets usually move in the opposite direction of interest rates.

However, the firm trend in the benchmark indices indicates that the inflation spike is perceived as a short-term phenomenon. Foreign investors have been net buyers for the past three months. They are a significant category and control about 15 per cent of the value of shares listed on stock exchanges. If inflation were a threat, you would see a reversal in the trend. Share prices would get knocked down as interest rates edge up or the inflation rate is likely to surge.

What happens next
Your first step in the world of personal finance begins with inflation as this column has often argued that it is your biggest enemy. Your financial battle is against inflation. Your investments have to earn a return that is twice that of the consumer price inflation rate.  

If prices of goods and services continue to rise, borrowing rates could stay at current levels. The inflation rate was over 5.5 per cent for November, the highest in 40 months. Interest rates adjust in line with the consumer price inflation rate.

While the RBI has brought borrowing rates down, it may not be able to cut rates further. Equity markets continue to witness buoyancy of fund flow from foreign as well as domestic institutional investors. Such qualified investors will not buy equity shares if prospects are poor. If you are young or middle-aged, you may want to continue with your equity-oriented investments. Those unwilling to take risks may want to look at balanced funds.

(The author is editor-in-chief at www.moneyminute.in.)



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