New Delhi: India’s annual food prices eased in early January for the third week running, but the central bank is still expected to tighten monetary policy by increasing cash reserves held at banks at its 29 January policy review.
Although a rise in fuel prices runs the risk of offsetting the decline in food prices, the Reserve Bank of India (RBI) is not expected to raise rates.
Markets have mostly factored in a 50-basis point rise in the cash reserve ratio (CRR), the level of cash banks must keep with the central bank. Analysts expect a rise in key rates as early as March, a Reuters poll showed on Thursday. “Rate action is warranted only when two conditions are fulfilled. One, when the generalised WPI goes beyond 10 percent. Second, when credit growth picks up substantially,” Rajiv Kumar, an economist New Delhi-based think tank ICRIER.
“As of now, RBI should signal change in monetary stance by going for a hike in CRR.”
The food price index rose 16.81% in the 12 months to 9 January, lower than an annual rise of 17.28% the previous week.
The fuel index rose to an annual 6.43% in early January. The index has risen over 9% since the end of March 2009, following an upswing in world crude prices amid signs of a global recovery.
“Whether rise in fuel prices will offset easing food prices is an open question, but there is a risk,” said Abheek Barua, chief economist at HDFC Bank in New Delhi.
Food prices have risen on supply shortages after the worst monsoon in nearly four decades, followed by floods in some regions that hit crops. Higher government prices paid to farmers were also a contributory factor.
Last week, India’s federal government ordered the sale of stocked grain and extended duty-free sugar imports by another nine months. Duty-free imports of white sugar were earlier allowed up to 31 March, while raw sugar shipments, without any import duty, are already allowed up to 31 December.
Annual wholesale inflation rose to 7.31% in December, higher than 4.78% in November, on higher food prices, with a government official predicting the headline number to touch double digits by March.
Prices of some essential food items like rice and wheat were up over 12% on year in December, while sugar prices rose about 54%.
However, agriculture minister Sharad Pawar said on Monday sugar prices fell 10 to 12% in the past two to three days.
While supply-side bottlenecks have driven inflation to date, demand side factors are beginning to surface.
In late November, cement companies raised prices by between Rs8 and 10 rupees ($0.17-$0.22) per 50 kg (110 lb) bag, reflecting infrastructure demand. Steel companies are likely to follow suit this month on a revival in demand and a sharp increase in input prices globally.
Although the government officials sound concerned about rising inflation, they seem to be wary of any sharp monetary tightening, worried it could choke off economic recovery.
The finance ministry’s chief economic advisor was quoted as saying on Tuesday food prices will cool off in one to two months, leading to a turn around in inflation, which will render “tampering” with interest rates unnecessary.