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Food inflation accelerates to year-high

Food inflation accelerates to year-high
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First Published: Thu, Jan 06 2011. 11 34 AM IST
Updated: Thu, Jan 06 2011. 11 34 AM IST
New Delhi: India’s food inflation accelerated for the fifth straight week to the highest in more than a year, reinforcing fears it will spill over to broader prices and pile pressure on the Reserve Bank of India (RBI) to tighten monetary policy.
Unseasonal rains have pushed up prices of vegetables such as onions and tomatoes in recent weeks, and the authorities are bracing to live with elevated price levels in the near term.
Onion prices increased increased by over 23% over the week. The food price index rose 18.32% in the year to 25 December and the fuel price index climbed 11.63%. This compared with 14.44% and 11.63% respectively in the previous week.
“This number reinforces the base case scenario of a 50 basis point rate hike in January. One has to be prepared now for a much larger frontloaded rate hike series than what one was expecting say a month ago and therefore the entire swap curve should shift upwards,” said Hitendra Dave, head of global markets, HSBC India, Mumbai.
Indian swap rates and bond yields rose after the larger-than-expected rise, cementing expectations for further rate hikes by the central bank in the upcoming 25 January policy review.
At 11:45 am, the most-traded 8.08% 2022 bond yield was up 1 basis point at 8.13%.
The 5-year swap rate rose 5 basis points to 7.80% while the 1-year swap rate was up 4 basis points at 7.06%, dealer said.
RBI, which had raised interest rates six times in 2010, is expected to increase rates by at least 25 basis points on 25 January when it reviews policy, a Reuters poll showed on Wednesday.
Analysts forecast rates to rise by 75 basis points in 2011. C. Rangarajan, chairman of the prime minister’s economic advisory council, said on Wednesday more action on interest rates may be needed from the central bank if inflation remains sticky.
Food articles have a weight of 14.34% in the wholesale price index, India’s most widely watched gauge of inflation, and the spurt in vegetable prices is expected to show up in the headline number when December data is released on 14 January.
Headline inflation had eased to a 12-month-low of 7.48% in November after hitting 8.58% in October. The RBI has said it would revise at the 25 January policy its end-March target of 5.5%.
The finance ministry’s chief economic adviser, Kaushik Basu, has said monetary and fiscal policy measures may not be adequate to tackle sector specific price rises and the country would have to live with such price rises.
The government will not increase diesel prices for now, the oil minister Murli Deora signalled on Wednesday, as the government walks a tightrope between reducing the burden of subsidies and tackling public anger over inflation.
Last week, India deferred a ministerial panel meeting to discuss a possible increase in diesel and cooking gas prices.
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First Published: Thu, Jan 06 2011. 11 34 AM IST