Fuel costlier, food prices fall marginally

Fuel costlier, food prices fall marginally

New Delhi: India’s food prices moderated slightly while fuel price inflation accelerated in late February adding pressure on the Reserve Bank of India (RBI) to raise rates at its April policy review.

The wholesale price inflation is already at 8.56% in January, just above the central bank’s end-March projection of 8.5%.

The food price index rose 17.81% in the 12 months ending 27 February, marginally lower than an annual rise of 17.87% in the previous week.

The recent government decision to raise fuel prices has also stoked inflation. The fuel price index rose 11.38% in the 12 months ending 27 February, shooting up from an annual rise of 9.59% in the previous week.

Market expectations of a rate hike remain unchanged as traders expect RBI’s next move will be to raise its benchmark lending and borrowing rates by at least 25 basis points each to 5% and 3.5%, respectively.

One basis point is one-hundredth of a percentage point.

The benchmark 10-year bond is hovering just below the 8% mark mirroring expectations of a rate hike in the near term.

This despite speculation that the Union government will borrow much of its estimated record borrowing of around $100 billion (Rs4.55 trillion) for 2010-11, that begins on 1 April, in the first half of the fiscal year.

The January industrial output data due on Friday, expected to be a robust 16.65% according to a Reuters poll, will also bolster the case for a rate hike in April.

Indian policymakers including deputy chairman of the Planning Commission have said earlier this week that food prices will moderate over the next few months.

Food prices have moderated only marginally this week, but with fuel prices on the rise, these are now spilling over to the broader economy.

This is reflected in the fact that manufacturing price inflation picked up to 6.55% in January from 5% in December.