New Delhi: Indian food prices surged nearly 15% in the year ended August as a poor monsoon hit crops, but analysts said moderate price pressures elsewhere in the economy meant an interest rate rise was unlikely for now.
The annual change in the overall wholesale price index was negative on 29 August for a 13th week, although a return to inflation looked imminent in September as the effect of last year’s high fuel and commodity prices fade out of calculations.
The WPI fell 0.12% in year to 29 August, close to expectations and slowing from the previous week’s 0.21% fall. However, the food articles sub-index rose an annual 14.8%, up from the previous week’s 14.5% rise.
Food prices have surged as drought has hit nearly half of India’s districts, hurting summer crops and forcing the government to take steps to bolster supplies.
The weakest monsoon in nearly four decades could also hurt the winter crop, keeping pressure on prices in coming months.
Gunjan Gulati, an economist at JP Morgan Chase, said supply concerns had driven up food prices, but noted that other prices were subdued and credit demand was sluggish.
“I thus expect that the fiscal measures—releasing the food stocks with the government, importing the foodgrains in short supply—will be the first mode of action likely to be adopted by the government, rather than monetary tightening to stem higher inflation,” said
Prime Minister Manmohan Singh said on Wednesday there was no shortage of food stocks but the government had to step up efforts to mitigate rural distress from the drought.
The rise in food prices has put pressure on Singh’s Congress party-led coalition government, which was re-elected this year partly on the back of its pro-farmer policies.
Economists and government officials agree that inflation will exceed the central bank’s July forecast of 5% at the end of the fiscal year in March, largely due to food prices.
“Food prices will remain high for some time. Inflation could be between 7 and 8% by end of March,” said Saugata Bhattacharya, senior vice president and economist at Axis Bank.
Reserve Bank of India governor Duvvuri Subbarao said on Monday inflation was becoming a concern sooner than expected and the current monetary stance must be unwound, although the impact on growth had to be considered.
However, finance secretary Ashok Chawla said on Wednesday that growth was the main economic worry even though inflation could rise to 5-6% at the end of 2009/10, highlighting the dilemma policy makers face trying to rein in inflation caused by shortages in food supply.
“Until the RBI sees inflation becoming more broader based than just the commodities sector, I think it will be wary of raising interest rates at this point as this may kill the recovery that is still nascent,” said Atsi Sheth, chief economist at Reliance Equities.
In its July policy review, the central bank left its key policy rate unchanged after cutting it by 425 basis points between October and April.
The economy grew 6.7% in 2008/09, slower than rates of 9% or more growth clocked in the previous three years, and policy makers expect it ti slow towards 6% in 2009/10 due to lower farm output.