Food prices rise 14.5% y-0-y despite inflation fall

Food prices rise 14.5% y-0-y despite inflation fall

New Delhi: The worst dry spell in nearly four decades pushed up food prices in India by an annual 14.5% in the week to 22 August, adding to worries that wholesale price inflation is poised to accelerate in coming months.

The widely watched wholesale price index fell 0.21% in the 12 months to 22 August, its 12th successive fall, although the number is distorted by the base effect of last year’s high energy prices.

“Maybe in another one or two weeks, WPI will be out of the negative zone. I think, WPI will definitely cross 6% by March end," said D.K Joshi, principal economist at domestic rating agency Crisil.

A government panel said this week that wholesale price inflation could rise beyond a 4 to 5% comfort zone by the end of the fiscal year in March.

Private economists say WPI could rise even faster, putting the central bank in a tough position given the inability of monetary policy to mitigate price rises driven by supply side shortages.

The WPI figure compares with last week’s 0.95% annual decline and a market forecast for a decline of 0.87%.

Farmers in parts of the country may get a late summer reprieve, however, as rains were near normal for the third week in the seven days to 2 September, official sources said, although one person said the rain was unevenly distributed.

The food articles index rose 14.5% from a year earlier as drought engulfed nearly half of India’s districts, affecting summer-sown crops and forcing the government to intervene to bolster supplies and crack down on hoarding.

Within the food group index, prices of sugar surged 37%, grains 12.6% and lentils 21.6%.

The consumer price index, which attaches greater weightage to food items, surged 11.29% in July. Summer crops have been hit by the worst rainfalls since 1972.

The benchmark stock index was up 0.4% from 0.3% before the data release, while 10-year bond yield was at 7.46%,from 7.43%.

Policy outlook

The central bank had flagged concern over price pressures in its July policy review, and raised its inflation forecast for the fiscal year ending March 2010 to 5% from 4%.

Last month, the central bank said policy makers face a dilemma over the timing and pace of exiting from an accommodative monetary stance, and deficient rains could affect the inflation outlook more than the growth prospects.

“It (food price rise) may not entail a monetary action soon, but there is a case building for some degree of monetary action by January," said Abheek Barua, chief economist, HDFC Bank.

In July, the central bank held policy rates steady after having slashed the key lending rate by 425 basis points between October and April, to help recovery in a fragile economy.

A slowdown in the economy had led to a fall in prices of manufactured products and metals from a year earlier, prompting the central bank to keep interest rates benign.

But demand has started picking up, as is evident from rising car sales, cement output and home sales.

“The week-on-week increase in manufacturing prices is also what we are looking at as this would come into play when it comes to hardening of interest rates," said Atsi Sheth, chief economist of Reliance Equities.

India’s Planning Commission, which advises the government on policy, forecast Asia’s third-largest economy would expand by 6.3% for 2009/10, compared with 6.7% in the previous year.

See The economy grew 6.7% in 2008/09, slower than the 9 percent or more growth clocked in the previous three years, and the central bank has forecast 6 percent growth in 2009/10 with an upward bias.