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Inflation at 7%; all eyes on RBI now

Inflation at 7%; all eyes on RBI now
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First Published: Fri, Jan 15 2010. 09 47 AM IST

Updated: Fri, Jan 15 2010. 09 47 AM IST
New Delhi: India’s monthly headline inflation rose on higher food prices, both primary and manufactured, and touched a 13-month high of 7.31% for December, up from 4.78% the previous month.
Analysts and bankers say that while the central bank would move to tighten liquidity, the economic conditions are still not sufficient to justify a rate hike during its forthcoming policy review on 29 January.
In December, inflation of food items reached 19.17% on the back of higher prices of pulses (42% higher than the year before), vegetables (39%), and potatoes (124%). Prices of manufactured food items also rose by 26% during the month, mainly due to higher sugar prices (54%).
The weak monsoon rains, 23% lower than average and the weakest since 1972, have harmed agricultural production in many parts of the country, leading to a spurt in food prices.
The government on Wednesday announced a host of supply-side measures to curb rising food prices. It announced import of refined sugar at zero duty till 31 December, selling of 2-3 million tonnes of wheat and rice in the open market over the next two months and asked state-owned trading firms to intensify import of pulses.
The Union government has also decided to convene a meeting of state chief ministers by the end of this month to contain hoarding of essential commodities such as wheat, rice, edible oils and sugar.
However, weekly inflation figures, also released by the commerce and industry ministry on Thursday for the week ended 2 January, showed food inflation coming down to 17.28%, against 18.2% in the previous week.
“Week-on-week it (food inflation) is down, which is a very good (sign). There are a whole lot of measures that (we) are going through that have been decided on,” chief economic adviser at the finance ministry Kaushik Basu said.
Satish Chandra Jha, economist and former member of the Prime Minister’s economic advisory council, said that the present spike in inflation is mainly due to artificial supply constraints because of hoarding and deficiencies in distribution systems.
Graphic: Ahmed Raza Khan / Mint
“The government is now looking into these loopholes. The general expectation is, in next couple of weeks food prices will come down with the fresh government measures and arrival of rabi (winter) crops in the market, unless something seriously goes wrong,” he added.
The present inflation level is much higher than the expectations of the Reserve Bank of India (RBI). In its second quarter review of monetary policy in October, the central bank had projected that baseline WPI (Wholesale Price Index) inflation would touch 6.5% by 31 March, “with an upward bias”—up from the 5% forecast in its first quarter review in July.
However, as the current drive in inflation is mainly attributed to supply-side constraints on the food items front, economists do not expect RBI to raise policy rates immediately.
“We don’t have concrete conditions for a rate hike as yet. RBI may not act in a hurry. April is where we see possibility of rate action,” said Shubada Rao, chief economist at Yes Bank Ltd.
Rao said the economic environment is better, but that “it might be a while before industry has the confidence to pass on any increase in raw material prices to the consumer. For the moment, we expect RBI to continue with its policy of draining liquidity through a likely increase in CRR”.
CRR, or cash reserve ratio, defines the amount of money banks have to keep with RBI.
RBI’s rate decision is more dependent on their perception of how quickly inflation is percolating into non-food items and how much rate support the economy still requires rather than this WPI, Samiran Chakraborty, head of research at Standard and Chartered Bank, said.
In a snap poll conducted by Mint among 12 bankers at the recently concluded Bancon, the annual conference of banks, majority of the bankers said RBI could hike CRR by 25-50 basis points from 5% at present, though that would not translate into rate hike by banks at least in the first half of this calendar year.
One basis point is one-hundredth of a percentage point.
A 50 basis points hike in CRR will suck out about Rs21,000 crore of liquidity from the monetary system.
The last time RBI made a change in its policy rate and CRR was in April.
Sanjiv Shankaran and PTI contributed to this story.
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First Published: Fri, Jan 15 2010. 09 47 AM IST
More Topics: Inflation | Food price | Monsoon | Pulses | Sugar |