Citi India has forecast the July CPI to be 6.4 percent and the August one to be 6.1 percent if the tomato prices continue to remain at the current levels. "Around 120bps of the possible 160bps jump in headline inflation in Jul-23 could be due to the spike in tomato prices," Citi India said on Thursday, July 13.

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This in turn, would put pressure on the Reserve Bank of India, which in its last two Monetary Policy Committee (MPC) meetings has kept the interest rates unchanged. The RBI governor has reiterated that this move of the central bank is a 'pause and not a pivot'.

"RBI’s tone at the Aug MPC meeting could affect the market pricing of the first rate cut. A dovish tone would be to 'look-through' volatile vegetable prices, while a hawkish tone would entail highlighting risk from repeated supply shocks. Our bias is to think that the RBI would prefer the first option to avoid unwanted volatility," Citi India said.

The COVID-19 pandemic, Russia's invasion of Ukraine, and China's zero-COVID policy, among other geopolitcal factors resulted in a huge demand-supply mismatch. Central banks across the world, taking cue from the US Fed, started to increase their interest rates to combat inflation. The RBI too had done the same. However, in the last two MPC meetings, it decided to keep the rates unchanged.

India's retail inflation for June increased to 4.81 percent from the previous month's 4.31 percent. It however remained within the Reserve Bank of India's tolerance range.

India produces 20 million metric tonne of tomatoes every year, but this year the production dropped by 31 percent pushing prices as high as Rs 100-200 per kg. Petrol and diesel are cheaper than tomatoes in parts of India. The surge in prices has also led to consumers cutting down their consumption of tomatoes. Eateries such as McDonald's in the north and east India too have removed tomatoes from their cuisines.

Citi India said in June, tomato prices increased 65 percent compared to the previous months. Even the prices of other vegetables rose by 8.3 percent from May, which it said was much higher than the general trend for June.

On Tuesday, experts CNBC-TV18 spoke to said the spike in vegetable prices is set to push the CPI inflation to an uncomfortable range.

Citi India said that if tomatoes continue to cost Rs 100 per kg, then the CPI tomato can rise 200 percent month-on-month in July 2023.

Beyond July, the price spike is linked to shortfall from the previous crop, and there is limited government control over tomato prices, unlike food grains. "Prices always mean 'revert intra-year," Citi said, adding that in almost each of the previous 10 years, the tomato prices touched an intra-year low of Rs 10-20/kg from an intra-year peak of Rs 40-60/kg. However, there was hardly any increase in the average prices of tomatoes in this period.

Citi India said that while tomatoes grow throughout the year, most of the fresh supply is available during the winter. And the supply-driven reduction in prices happens partly in the October to December period, but mostly in the January to March period.

Last week, CNBC-TV18 spoke to wholesalers, agricultural economists, who said the prices of tomatoes are likely to come down in the next 20-25 days, and this could even stretch to August.

On June 30, the government said it expects the prices to drop in the "next 14 days". On July 12, it was reported that the Centre is going to sell tomatoes at discounted prices in Delhi NCR from Friday, July 14.

First Published:Jul 13, 2023 3:32 PM IST