MUMBAI: If you are upset with high tomato prices, then get ready to shell out more for the potatoes and onions. A study by the Reserve Bank of India (RBI) appointed group has found that rise in the prices of tomatoes gets transmitted to potatoes and onions. The findings of the study by Development Research Group (DRG) have come at a time when prices of tomatoes are hovering over 100 per kilogram across the country.
“There is horizontal volatility transmission across these three vegetables in both retail and wholesale markets. This transmission can be explained by the common driving factors leading to spillovers across the vegetable prices,” said the study titled ‘Anatomy of Price Volatility Transmission in Indian Vegetables Market’.
“These include common supply shocks, such as extreme weather shocks, hoarding, pest attacks, post-harvest losses and strikes/protests as well as an increase in input costs,” it added.
Horizontal transmission refers to a situation when price volatility is transmitted across three vegetables. Some degree of substitutability and complementarity have also facilitated the transmission of prices, note the study which used the Department of Consumer Affairs (DCA) data for the analysis covering a period from January 3, 2011 to March 31, 2021.
“The empirical estimates indicate price volatility transmission from tomato to onion and potato, in both retail and wholesale markets,” said the study Findings of the study hold implications for the management of overall inflation. The RBI has been trying hard to bring retail inflation to its target of 4 per cent and has hiked the repo rate by 250 basis points during the current rate hike cycle. Vegetable prices have historically tended to be highly volatile imparting volatility to overall inflation. The findings of this study will help the RBI future trajectory of inflation. “When there is a shock in tomato prices, it is possible to estimate the magnitude of the influence on the prices of onion and potato,” said the study.
Vegetable inflation is a significant contributor to overall food inflation given their high weight in the CPI-food and beverages index. Furthermore, among vegetables, the prices of the three key vegetables -tomato, onion and potato- are highly volatile.
“Although TOP (Tomato, Onion, Potato) forms a small part of the CPI basket, the volatility in headline inflation is significantly driven by the volatility of TOP. In the CPI food group, vegetables being the most perishable have witnessed the maximum volatility. TOP are the three key vegetables based on their weight in CPI vegetables, which are also the staple vegetables of India,” noted the study. As volatility in vegetable prices is driven by recurrent supply shocks, supply management measures by the government such as strengthening the supply chain, placing stockholding limits on traders, wholesalers and retailers, developing cold storages, reducing post-harvest losses and integrating the participants in the value chain, can help in ensuring domestic availability and stable prices.