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Inflation returns as food prices surge

Inflation returns as food prices surge
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First Published: Thu, Sep 17 2009. 02 36 PM IST
Updated: Thu, Sep 17 2009. 02 36 PM IST
New Delhi: Surging food prices have driven India into inflation faster than expected, adding pressure on the Reserve bank of India (RBI) to speed an exit from easy monetary policy and prompting further government steps to curb price rises.
India’s wholesale price index (WPI) rose by 0.12% in the year to 5 September, compared with the previous week’s 0.12% fall and analysts’ forecast of a 0.08% decline, a weekly data release on Thursday showed.
The food articles sub-index rose an annual 15.4%, up from the previous week’s 14.8% rise, as a dry spell parched nearly half of India’s districts, hurting summer crops.
In its latest move to check soaring food costs, India’s cabinet on Thursday approved an extension of limits on stocks that can be held by traders of sugar, vegetable oil, lentils and rice until September 2010.
“Inflation is already positive again and the Reserve Bank of India faces a real tough task. The governor has said he wants to keep interest rates low till the economy recovers fully, but inflation is galloping and being responsible for inflation, it can’t ignore it,” said Amol Agarwal, economist at IDBI Gilts.
High food prices pose a dilemma for the RBI, which can do little about price pressures caused by supply-side bottlenecks.
Also, the effect of soaring fuel and commodities prices a year ago is poised to recede in coming weeks, as the WPI peaked in the first two weeks of September 2008. If prices held steady between now and the end of October, inflation would still reach 3%.
Prices of industrial raw materials and fuels, meanwhile, have been rising in recent weeks.
“Much of the increase in inflation is clearly indicative of input cost pressures picking up, and with demand set to recover we should see output prices also picking up with a lag,” said Sonal Varma, economist with Nomura in Mumbai.
“This will clearly mean that the RBI’s concern on inflation is likely to continue and the exit from the current loose policy will depend on how soon growth picks up from here,” she said.
India has taken steps to manage the impact of a poor monsoon, including increasing imports, limiting exports, and clamping down on hoarding.
Private economists expect the central bank to begin retreating from easy monetary policy towards the end of the fiscal year. The first shift could be through withdrawing some of the extra liquidity in the banking system or increasing banks’ reserve requirements, rather than by raising interest rates.
Government Pressure
The rise in food prices has put pressure on the Congress party-led coalition government, which was re-elected this year partly on the back of its pro-farmer policies. It faces three state-level elections next month.
But ministers have said food stocks were comfortable and that will help counter the drought situation although the government could import food to meet demand.
On Tuesday, RBI governor Duvvuri Subbarao said inflation was already 5.2% so far this fiscal year and it would accelerate further by the end of March.
But he made it clear the RBI would not unwind its accommodative policy until recovery in Asia’s third largest economy was secured.
“RBI will tighten only after there is a decisive upturn in the economy,” said D K Joshi, principal economist at rating agency Crisil.
In its July policy review, the central bank left its key policy rate unchanged after cutting it by 425 basis points between October and April.
The economy grew 6.7% in 2008-09, slower than rates of 9% or more in the previous three years, and policymakers expect it to slow towards 6% in 2009-10 due to lower farm output.
India’s 10-year benchmark bond yield was at 7.13%, down one basis point from before the WPI data.
The partially convertible rupee remained flat near 48 per dollar while the stock market was up 0.4%.
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First Published: Thu, Sep 17 2009. 02 36 PM IST
More Topics: Inflation | WPI | Food prices | Commodities | RBI |