Food inflation snaps easing trend in mid-March

Food inflation snaps easing trend in mid-March

New Delhi: India’s food inflation snapped a three-week easing trend in mid-March and fuel inflation remained at elevated levels, keeping pressure on the central bank to rein in broader inflation.

The food price index rose an annual 10.05% in the week to 12 March, higher than a 9.42% rise in the previous week as prices of potatoes and vegetables rose, data released on Thursday showed.

The fuel price index climbed 12.79% in the same week, the same level as in the previous week. Bonds fell on the data.

High food prices kept India’s headline inflation up for much of the past year. But now rising energy prices on unrest in the Middle East are a bigger challenge to inflation management as costlier fuel runs the risk of stoking overall inflation.

“Fuel inflation has remained steady as not much of pass through of high global crude prices is happening," said N R Bhanumurthy, an economist at Delhi-based think-tank National Institute of Public Finance and Policy.

“Once the domestic prices are reviewed to bring them in line with international prices, you will see an acceleration in fuel inflation. But any such revision in fuel prices is unlikely before the state legislative elections."

Bhanumurthy said the rise in food price inflation was a one-off move and should ease going ahead.

The yield on most traded 8.13% 2022 government bond was up 1 basis point at 8.07% after the data release. The 5-year swap rate climbed 2 basis points to 8%, while the 1-year swap rate was up 2 basis points at 7.47%.

Headline inflation had unexpectedly quickened to 8.31% in February from 8.23% a month ago on rising fuel and manufacturing prices.

High prices are a major headache for the Congress-party led ruling coalition, which faces key state elections next month. A poor showing could unravel Prime Minister Manmohan Singh’s government, which is already under attack for a series of corruption scandals.

The Reserve Bank of India (RBI) raised interest rates last week for the eighth time since last March and said it was likely to maintain its anti-inflationary bias.

It also raised its forecast for headline inflation at the end of March to 8%, from an earlier 7%, citing risks stemming from high global crude prices.

“I don’t think the rate hike cycle has peaked yet. So I expect further rate hikes going ahead," Bhanumurthy said.

World oil prices are trading around $115 a barrel as unrest in Yemen raised concerns about a further threat to supply from the Gulf with Libya’s flow also crippled by a standoff between rebels and the government.