Anatomy of Price Volatility Transmission in Indian Vegetables Market

Today the Reserve Bank of India released on its website the DRG Study1 titled, “Anatomy of Price Volatility Transmission in Indian Vegetable Market”. The study is co-authored by Puja Padhi, Himani Shekhar, and Akanksha Handa. The study was funded by the Reserve Bank of India under the DRG Study Series.

The study investigates the horizontal and vertical volatility transmission for three key vegetables viz., tomato, onion, and potato (TOP). Horizontal volatility transmission relates to transmission from one vegetable to another, while vertical volatility transmission implies transmission across the supply chain i.e., between wholesale and retail prices.

In India, food price inflation has been a major concern primarily reflecting the food price fluctuations both on the upside and downside. Despite making up a small portion of the Consumer Price Index Combined (CPI-C) basket, tomato, onion, and potato (TOP) – is a major contributors to the volatility of headline inflation. Volatility in these vegetable prices may generally be high due to their high perishability and vulnerability to weather-related disturbances on the back of relatively less elastic demand as these are key vegetables for Indian households.

 The prevalence of significant volatility transmission across the three vegetables demonstrates that when there is a shock in tomato prices, it is possible to estimate the magnitude of the influence on the prices of onion and potato using the transmission mechanism shown in the study.

The key findings from the study are as follows:

The following are the conclusions from the study. First, there is horizontal volatility transmission across these three vegetables in both retail and wholesale markets. This transmission can be explained by the common driving factors leading to spillovers across vegetable prices. These include common supply shocks, such as extreme weather shocks (cyclones, monsoon failure, unseasonal rains, droughts, heat waves, etc.), hoarding, pest attacks, post-harvest losses, and strikes/protests as well as an increase in input costs. In addition, some degree of substitutability and complementarity can also be seen among these vegetables. The empirical estimates indicate price volatility transmission from tomato to onion and potato, in both retail and wholesale markets.

Second, the vertical transmission (i.e., from wholesale to retail prices or vice versa) can be seen in the case of all three vegetables. While the volatility transmission between the wholesale and retail prices is bidirectional in the case of potatoes, there is a unidirectional transmission from wholesale to retail prices in the case of onions and tomatoes. The bilateral price volatility transmission between the wholesale and retail prices of potato could be because potato is relatively more storable as compared to tomato and onion. Hence, when retail prices spike because of any issue in the supply chain, the stored wholesale potato prices also respond to that shock.

Third, the three vegetables have a dynamic conditional correlation in the case of both retail and wholesale prices which demonstrates how correlations among their prices have changed over time. A higher degree of correlation among prices suggests better co-movement and price integration. Fourth, the study does not find any evidence of a significant differential impact of positive or negative price volatility shocks (asymmetric effects) across these three vegetables in both retail and wholesale markets.

Source: This post is the extract from the original DRG Study Series of RBI under the same title. However, the image posted here is not related to the original post.

“The DRG studies are the outcome of collaborative efforts between experts from outside the Reserve Bank of India and the pool of research talent within the Bank. These studies are released for wider circulation with a view to generating constructive discussion among the professional economists and policy makers”, said RBI.