Rise in food prices strengthen case for RBI action

Rise in food prices strengthen case for RBI action

New Delhi: Indian food prices rose nearly 19% annually in mid-December, reinforcing the case for the central bank to withdraw excess liquidity in January to stem inflationary expectations.

Food prices have been surging after the driest spell in nearly four decades and flooding in some parts of the country hurt crops and pushed up food prices.

Government data showed on Thursday that food prices rose 18.65% in the year to 12 December, slightly lower than the 19.95% annual rise a week earlier.

“Even though the current food inflation is due to supply side shocks, it will spill over to other sectors. In that scenario, monetary measures are important to stem inflationary expectation," said N.R. Bhanumurthy, an economist with the National Institute of Public Finance and Policy.

“A hike in cash reserve ratio (CRR) will make sense. We expect it to be raised by 50 basis points by January policy," he said.

The benchmark 10-year bond yield was steady at 7.71% after the data.

The fuel index rose an annual 3.95% in the 12 months to 12 December, as the statistical aberrations caused due to price spikes of 2008 faded out.

Monthly price data for November showed manufacturing prices rose an annual 4%, a sign a growing economic recovery is allowing firms to pass on higher costs.

Policy tightening

On Wednesday, finance minister Pranab Mukherjee said inflation was now a challenge for the government.

Planning Commission deputy chairman Montek Singh Ahluwalia said an annual inflation of 5-6% was quite reasonable.

The annual wholesale price inflation, which stood at 1.34% in October, rose to 4.78% in November, and analysts said it could reach 8% by the end of the fiscal year in March, above the central bank’s forecast of 6.5%.

The Reserve Bank of India cut its main lending rate by 425 basis points between October 2008 and April, slashed the cash reserve ratio and pumped cash in financial markets to shore markets and the economy up against the global financial crisis and slowdown.