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September 19, 2013

Onion Prices Sting India's Central Bank Ahead of Policy Review

by Reuters

The aroma of frying onions from the Britannia and Co. restaurant might not penetrate the office of India's central bank 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 the Reserve Bank of India (RBI) wrestles over how to help stabilize the rupee currency and tackle inflation without further dampening economic growth.

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

The U.S. 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 percent higher than a year earlier, while other vegetables shot up 77 percent, 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.

Eaten raw as a side dish, or blended into a vast array of curries, onions play a prominent role in Indian cuisine and public anger rises quickly whenever prices spike.

Price pinch

In Britannia, the pinch is being felt by customers who include employees of the Reserve Bank, who drop by to lunch on steaming plates of its famous Parsi berry pulav rice.

“Instead of one person eating one plate, two people are splitting. And three people are dividing two plates,” said Boman Kohinoor, the 91-year-old co-owner of the restaurant.

Much remains unchanged in Britannia, which was founded in 1923, 12 years before India's central bank was set up. But the prices keep on rising.

The restaurant raised prices on its menu by between 30 and 50 rupees ($0.50-$0.80) earlier this year - a fragrant plate of rice-based chicken biryani now costs 350 rupees - and Kohinoor said the soaring costs of ingredients may force him to hike prices again by April.

With overall food prices up an annual 18 percent last month, Kohinoor's new neighbor at the Reserve Bank will probably be careful not to stoke inflation in other areas, despite calls from industry to cut interest rates and lower borrowing costs.

But 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 percent 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 60 rupees 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 percent, advertising the deal with the image of an onion in a jewelry case. Demand was so high its site crashed.

But Rajan, who had a lucky break on Wednesday when the U.S. 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 on Twitter on Thursday.