Citizen’s MPC: Tomato inflation may keep RBI MPC a tad hawkish but unchanged on rates and stance

Pronab Sen explained that the RBI was facing two challenges — vegetable prices and uncertainty around exchange rates.

“The trends indicate that the exchange rates will continue to weaken, which means there will be upward pressure on inflation from the external side, regardless of what is happening to global prices,” he said.

On vegetable prices, he said the central bank needs to focus on the extent of influence that the hikes will have on inflationary expectations in the country.

Samiran Chakraborty said that at least across the vegetable basket, the 11 vegetables that are tracked, there has been a significant increase in prices and therefore, it’s generalised vegetable price inflation.

“On a month-by-month basis, the vegetable price inflation could be 35-40 percent as well. Because it's not showing up as much in onions and potatoes, probably why we're not discussing it now,” he said.

Chakraborty, however, pointed out that the good news is that beyond vegetables, the rest of the food index is still doing reasonably okay but there could be price pressures.

JPMorgan’s Sajjid Chinoy shed light on the global picture. He said there are three things to watch globally — more resilience, lack of near-term recession prospects and US exceptionalism.

“First half global growth is tracking 2.7 percent above trend. So, resilience is showing up in growth and in labour markets. That has meant that markets have begun to price out in near-term recession, and the rate cuts that come with it,” he said.

Chinoy said there will likely be a sectoral shift, where services may slow, but manufacturing may pick up in the second half of the year. According to him, there's a restocking cycle underway, tech has bottomed out and final goods consumption is holding up.

“The third element is US exceptionalism. We're seeing Europe is disappointing, and China has disappointed, but the US is holding up. That means a stronger dollar is putting some pressure on emerging market currencies.”

However, Nomura’s Sonal Varma believes that US exceptionalism is unlikely to stand for long. He sees one of two scenarios playing out. “Near term, it does look like disinflation should sustain but over the next six to nine months, we think that lags will play out. The credit standards are tightening so that spill over into business investment and eventually into the labour market. Our view is that US exceptionalism is not going to last for long. From a central bank's perspective, given the uncertainty central bank needs to be prepared for either of the scenarios."