New Delhi: Wholesale food prices rose at the fastest pace in 11 years, underscoring the central bank’s concern that it may need to use monetary policy to stabilize inflation expectations.
Also See Food Inflation Highest Since 1998 (Graphics)
An index of food articles compiled by the commerce ministry increased 19.05% in the week ended 28 November from a year earlier, following a 17.47% gain in the previous week. A measure of fuel and electricity prices rose 0.06%, the first increase this year, the ministry said in a statement in New Delhi on Thursday.
The Reserve Bank of India (RBI) is seeking a balance between supporting a nascent economic recovery and keeping inflationary pressures under control. Central bank governor D. Subbarao had said on 7 December that while monetary policy is an “ineffective instrument” to rein in growth in food prices, such tools may be needed to damp inflation expectations.
“The risk that food prices may feed into second round effects and demand for wage increases is reasonably higher than before,” said Robert Prior-Wandesforde, senior Asia economist at HSBC Holdings Plc in Singapore. “It probably is wise for the central bank to begin the process cautiously, starting with some withdrawal of liquidity and following it up with rate hikes.”
Food costs are rising in Asia’s third largest economy as the weakest monsoon since 1972 hurts farm output. The central bank forecasts inflation at 6.5% by 31 March, from 1.34% in October and 0.5% in September.
The primary articles index, with a 22.02% weight in the wholesale price inflation basket and comprising mainly food items, rose 13.9% in the week ended 28 November from a year earlier, the government said on Thursday. That is also the highest since December 1998.
The central bank may need to tighten monetary policy to help contain a spillover from food price inflation, C. Rangarajan, economic adviser to Prime Minister Manmohan Singh, had said on 3 December.
Subbarao had started to withdraw the monetary stimulus in October by ordering lenders to put a greater proportion of deposits in government bonds, even as he has kept the benchmark reverse repurchase rate unchanged at 3.25% since April.
The central bank may start raising interest rates as early as January, increasing borrowing costs by 3 percentage points in 2010, Goldman Sachs had said in a research report dated 3 December.
RBI may raise the cash reserve requirement at its January meeting, HSBC has predicted. The proportion of deposits lenders keep with the central bank as cash reserves is now 5%.
The central bank will probably boost the repurchase rate and the reverse repurchase rate from March, Prior-Wandesforde said.