Rising food prices, especially the soaring onion prices, have not only burned a hole in the consumer's pocket, but now it has become a big concern for the RBI too. The new governor, Dr. Raghuram Rajan, has increased rates twice since September 2013 in order to tame inflation.
The wholesale price index, or WPI, has increased to 7% in October from 6.46% in September. Though, it has come down from the October 2012 number of 7.32%, food inflation has almost tripled since last October to over 18%. Vegetable prices played a key role. Overall, vegetable prices jumped over 78% while onion prices saw a whopping 278% increase. Despite RBI making various attempts to control inflation, it still continues to remain quite high. So what is the reason for this?
In our view, there have been structural factors that have fueled the inflation. These include lack of proper irrigation facilities, unpredictable food production, lack of infrastructure, improper supply chain and so on. Then, there is corruption and vested political interests which have also played a role. This has resulted in hoarding at wholesale or producer levels and the government's failure to address the same has also fueled prices.
While the RBI has been taking various steps to insulate the common man from rising inflation, very little action has been seen from the government. Despite the announcement of some reforms, the government does not seem to have done much to control soaring prices.
While global commodity prices cannot be controlled and might keep pinching consumers, the internal factors are very much in the government's hands. Thus, in our view, the RBI cannot be the sole entity responsible for controlling inflation and the government needs to get its act together and ensure that supply side shocks are ironed out.