There is plenty of reason to cheer on the inflation front — particularly food inflation.
The Monetary Policy Committee, in its meeting today, revised its headline inflation forecast for fiscal 2026 down a further 60 basis points to 3.1%, noting the substantial downtick in food inflation of late, led by easing foodgrain inflation and a sharp decline in vegetable inflation rate.
We dug deeper into the vegetable price component to see what to make of the recent increase in retail prices observed on the ground. The takeaways are revealing.
Vegetable inflation has been negative from around the start of 2025 and plunged 19% in June.
While expectations are this trend could hold for some more time, prices on the ground tell a different story.
Tomato was costlier in July compared with June levels, as were potatoes and onions. On-month tomato prices were up 32%, onion by over 5%, and potato by 2%.
Does that signal a return of the inflationary wave?
While the jury is out on that, a seasonal spike that began in summer is certainly underway. The good part is the rise this time is less than in the past.
Vegetables have the third-highest weight in the food index of the Consumer Price Index after cereals and milk. But they are the most volatile component because of their perishable nature and limited cold storage and transportation infrastructure.
Erratic weather has been pushing up vegetable prices in recent years. Between fiscals 2016 and 2020, they were up 4.2% on average, and between fiscals 2021 and 2025, by 7.2%.
Last fiscal, while food inflation softened 20 basis points to 7.3% on-year, excluding vegetables, the rest of the food index saw a sharper drop to 4.9% from 6.1%.
That underscores the key role vegetables play in keeping food inflation elevated.
Interestingly, in the quarter ended June 2025, vegetables, along with other food categories, subdued overall food inflation to 0.5% from 4.1% in the preceding quarter. The average vegetable inflation in the quarter was 14.8%.
Price Rise Not Yet Alarming
Data on the seasonal uptick suggests there is little to worry because of two reasons. One, the seasonal rise is lesser than last fiscal, when vegetable prices were higher than the typical seasonal climb. Two, the rise is lesser than the past monthly trend as well.
The on-year price movement (or the inflation rate) in vegetables is likely to remain in comfortable territory even during this seasonal bump.
For the first quarter of fiscal 2026, we looked at the movement in the monthly prices of vegetables by indexing their level in April to 100.
To gauge the magnitude of price swings in historical context, we tracked data for fiscals 2024, 2025 and 2026 so far, and compared that with the average movement between fiscals 2014 and 2023 — as a long-term, or typical benchmark.
Encouragingly, since the second half of last fiscal, the drop in vegetable prices has been sharper than typical as healthy agricultural production ensured stability in market arrivals.
The trend has continued this fiscal. The seasonal rise so far — according to inflation data for May and June — has been milder than normal and lesser than the spike seen last fiscal.
Prices rose faster than typically in the first half of last fiscal because of heatwaves between April and June. However, healthy rainfall between July and September supported agricultural production, including that of vegetables, which corrected prices in the second half. For example, onion inflation fell to an average 20.5% in the second half from 53.9% in the first.
According to Crisil Intelligence, during the 2025 marketing year, production of price-sensitive vegetables, such as onion, potato, and tomato is estimated to have increased 19%, 5%, and 2%, respectively.
The preceding year had seen a 20% decline in the production of onion and 5% in potato. Tomato supplies suffered for a few months due to crop damage.
Between January and March 2025, the downward pressure on prices was more than typical between fiscals 2014 and 2023.
Continued market arrivals have sustained the downward pressure and the seasonal, monthly uptick in prices in May and June were lower than the past trends.
The monsoon this season is expected to buoy agriculture production, including for vegetables that, along with ample stocks, should keep prices soft.
So far, rains have exhibited healthy momentum at 6% above the long period average as of July-end.
The India Meteorological Department expects above-normal rainfall for the rest of the season. This bodes well for the upcoming rabi season also because of likely improvement in soil moisture.
Vegetable inflation remains inherently volatile and the recent downtick has the potential to quickly rebound if there is a weather shock. Besides, the favourable base effect is expected to start waning in the third quarter of this fiscal year.
A study published in a recent Reserve Bank of India Bulletin showed rainfall and temperature anomalies exert an upward pressure on vegetable prices, with the latter having a more immediate impact, and increasing in importance since 2022.
Rough calculations show if inflation in other categories remains at first-quarter levels for this fiscal and vegetable inflation averages 7.2% (same as during fiscals 2021 to 2025), average headline inflation could inch up to 4.2% this fiscal (from 2.7% in the first quarter).
That is just 40 bps lower than the average inflation rate in fiscal 2024 and an overshoot of 50 bps from the RBI’s current estimate for the fiscal.
This underscores why weather patterns need close monitoring, and their potential risks to the inflation trajectory.
Our base case food inflation forecast for this fiscal assumes normal and supportive weather conditions.
Additionally, expected softness in other food categories, particularly cereals and pulses, should cushion any upward pressure on food inflation.
All things considered, the recent optimism on the inflation front appears justified.
But eyes peeled on weather disruptions, please.
Dipti Deshpande and Bhavi Shah are principal economist and economic analyst respectively at Crisil Ltd.
Disclaimer: The views expressed here are those of the authors and do not necessarily represent the views of NDTV Profit or its editorial team.
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