New Delhi: Annual food price inflation eased in early October but remained stubbornly high, keeping pressure on the central bank to raise policy rates by 25 basis points at its review on 2 November.
While high food prices are largely beyond the scope of monetary policy, they feed into rising inflation expectations and make government targets to bring headline inflation down to 6 percent by the end of December increasingly challenging.
Investors have been pricing in a 25 basis point rate hike when the Reserve Bank of India reviews policy on 2 November, after the annual wholesale price index rose 8.62% in September from 8.5% in August.
”RBI is expected to raise rates by 25 basis points on 2 November, though it will have marginal impact on food inflation,” said Basanta Pradhan, an economist at the Institute of Economic Growth in Delhi who expects food inflation to ease into single-digits in the next three months on a new harvest and the high base effect.
China’s central bank on Tuesday raised rates for the first time in nearly three years, and on Thursday reported inflation of 3.6%, a 23-month high.
A rate rise in India would be the sixth since March for a central bank that has been scrambling to cope with headline inflation that was in double digits for six months through July.
Data on Thursday showed the food price index in the year to Oct. 9 rose 15.53 percent, compared with 16.37%, in the previous week, as prices of poultry, fish, fruits and vegetables eased.
Fuel inflation for the same period was stable at 11.14%. The primary articles price index was up 18.05%.
Food makes up 14% of the wholesale price index (WPI) while fuel contributes 15%.
Analysts believe the Reserve Bank of India is nearing the end of its tightening cycle and expect at most two rate increases by end-March 2011, when the fiscal year ends.
“Even if food inflation has come off slightly, over 15% is still quite high and uncomfortable for RBI. The only saving grace is there was no negative surprise,” said a dealer at a private bank.
India’s chief statistician, T.C.A. Anant, said on Monday headline inflation was likely to come down significantly with the start of new harvest arrivals from mid-November, which would soften food inflation.
On Wednesday, India raised the price it will pay to domestic farmers to buy new season wheat by 1.82%, the lowest increase in five years, signalling adequate stocks of the grain and to ensure minimum impact on retail food prices.
High food prices are a headache for India’s ruling Congress party, which faces key state elections this year and next.