Three charts show how expensive potatoes could stop Rajan from giving India a parting gift

Even amidst wild speculations about who the next governor of the Reserve Bank of India will be, it is Raghuram Rajan everyone is obsessed about. For the past few weeks, business papers have been expecting that Rajan, who developed quite a reputation for being an “inflation hawk” and therefore holding interest rates, will finally relent in his last monetary policy review – and cut rates.

It would have been a perfect signoff from a man who kept on defending his policy stance arguing that inflation can’t be taken lightly even as his detractors argued that his unwillingness to cut interest rates “wrecked the economy”.

But now, that is unlikely to happen.

Wholesale inflation figures released by the government on Thursday vindicated Rajan’s stance that prices are still rising for certain essential commodities which could mean that the interest rate cut everyone hoped for is probably not going to happen.

In June 2016, the annual inflation rate as measured by the Wholesale Price Index rose by 1.62% as compared to 0.65% in May and a negative rate of -2.13% in June last year. The inflation data released by the Ministry of Commerce and Industry quite clearly showed that food prices in the economy are soaring and everything from milk to cereal is set to become more expensive.

As the above chart shows, food inflation in June reached 7.8% – its highest point in the last 22 months. The rise in food inflation has been attributed to a continuous rise in prices of vegetables since April. Moreover, it’s the spike in prices of two staple vegetables that seem to be leading the inflation – tomatoes and potatoes.

Between May and June this year, prices of tomatoes went up by Rs 600 per quintal while potato prices in the wholesale market rose by a whopping 60% for the second consecutive month.

This is in stark contrast to the wholesale prices of potato in the beginning of the year. In January and February, the prices of potatoes actually declined by 17% and 7% respectively.

A similar sharp spike in prices was seen for other food items that are commonly consumed by Indian households such as milk, cereals and wheat. Overall vegetable prices in wholesale market rose by a sharp 16% in June as compared to just 2% in April.

While experts suggest the spike in prices is partly cyclical and partly due to slightly late arrival of monsoon, it has set the tone of the narrative for now as industry analysts claim that prices needs to be watched “closely”.

The credit rating agency India Ratings has said on Thursday that the spike in the prices of cereals warrants a close watch and the government should use its own buffer stock to bring down the prices in the market. Its analysis, however, stayed clear of speculating the cause of steep price rise.

“It is, however, difficult to say whether the escalation in cereals prices is a temporary response to this delayed sowing or there is something else that has led to the sudden spike in the prices of cereals,” Anuradha Basumatari, an analyst from India Ratings wrote.

It added that unlike cereals, there is not much the government can do to arrest prices of pulses or vegetables.

However, a silver lining came in the form of drop in the inflation rates for onions which registered a sharp decline of 28%. At the same time, fuel and power inflation continues to be in the negative and so do minerals and textiles.

But, this isn’t likely to prove enough for Rajan to cut rates even as the RBI adopted the new Consumer Price Inflation Index (combined) as the key measure of inflation. Recent data showed that even CPI rose 5.71% in June and reached its 22-month-peak making a rate cut highly unlikely.

While Rajan had kept rate cuts the same in his last policy review and hinted at a cut later this year if good monsoon eased prices, the latest data isn’t too reassuring.

Climbing inflation is going to haunt even Rajan’s successor, the Indian Express wrote on Friday.

“From the government’s perspective, however, the continued rise in inflation also means that Rajan’s predecessor [successor], too, is going to find it difficult to cut rates later in the year,” the paper wrote in an editorial. “Given the nature of inflation in India, an interest rate cut is not likely anytime soon.”