The Monsoon and Food Inflation

How poor, excessive or badly timed rains drive up prices of vegetables, pulses and cereals, and why the RBI watches the monsoon closely.

Food makes up a large share of India’s consumer price index, especially for poorer households. The monsoon is one of the biggest drivers of food inflation.

How rainfall affects prices

Deficient rain reduces harvests of rice, pulses, oilseeds and vegetables, pushing prices up.
Excess rain and floods can destroy standing crops and disrupt transport, also raising prices.
Uneven timing, such as a long dry spell after sowing, can hurt yields even when total rainfall is normal.

Vegetables: the most volatile

Tomatoes, onions and potatoes are especially sensitive:

They are perishable and hard to store for long.
Production is concentrated in a few states.
Heavy rain can damage crops and disrupt supply.

In July 2023, tomato prices in many cities surged to around 200 rupees a kilogram after heavy rains and heat disrupted supplies, before falling back within weeks.

Pulses and cereals

Poor monsoons reduce pulse production, often forcing India to import more. Cereal prices are cushioned by large government stocks of rice and wheat.

Why the RBI cares

The RBI targets consumer price inflation. Food price spikes from the monsoon are supply shocks, which interest rates can’t directly fix. But the RBI worries that persistent food inflation can raise inflation expectations and push up wages and other prices. So it monitors the monsoon when setting policy.

Government tools

Buffer stocks of cereals, pulses and onions released to cool prices.
Export restrictions and import duty cuts.
Stock limits on traders.
Subsidised sales of items like tomatoes and onions.

Longer-term fixes

Better cold storage and processing to smooth supply of perishables.
Crop diversification across regions.
Irrigation to reduce dependence on rain.

The tomato shock

Heavy rains damage tomato crops in the main growing states in July. City prices jump fivefold within weeks. Households cut back on tomatoes, restaurants raise prices, and the government sells tomatoes at subsidised rates in some cities.

Thinking interest rate hikes can quickly lower food prices

Rain-driven food spikes are supply shocks. Interest rates affect them only indirectly, mainly by anchoring expectations.

Key takeaways

Deficient, excessive or badly timed rain can raise food prices.
Perishable vegetables like tomatoes and onions are the most volatile.
The RBI watches the monsoon because food inflation can affect expectations.
Buffer stocks, trade measures and better storage help manage price spikes.