Monetary policy can't tackle food costs - Ahluwalia

Vendors arrange vegetables on their carts at a wholesale vegetable market in Chandigarh in this November 8, 2009 file photo.

KOLKATA, India (Reuters) - The sharp surge in food prices reflects the impact of the drought and inefficient distribution, which could not be addressed by monetary policy, the deputy head of India's Planning Commission said on Tuesday.

While the increase in food prices was to some extent expected, it was a concern -- food prices rose an annual 20 percent in early December -- but they should decline in January, Montek Singh Ahluwalia told a CII event by video conference.

"From January you will see a decline a food prices. What you see now is speculative, probably due to the drought situation. The stock situation is relatively OK," Singh said.

"Problems such as this cannot be tackled by blunt instruments like monetary policy."

Food prices have jumped on supply shortages after the weakest monsoon rains in 37 years and then floods in parts of the country hit crops, raising expectations the central bank will tighten to stop inflationary pressures spreading into the broader economy.

Analysts expect the Reserve Bank of India (RBI) to tighten policy as early as this month, starting with a hike in banks' cash reserve requirements followed by interest rate rises.

Those concerns have pushed 10-year bond yields to 13-month highs and acted as a brake on the stock market.

"Price increase at the retail level is much more than the increase at the wholesale level. This is because of dysfunctionality in the distribution system," Ahluwalia said.

"The ministry is looking into it, but whenever required, we should import," he added.

As part of the steps taken to shore the economy up against the global financial crisis and downturn, the RBI cut its short-term lending rate, by 425 basis points between Oct. 2008 and April and slashed banks' reserve requirements.

(Reporting by Niladri Bhattacharya; Writing by Anurag Joshi; Editing by John Mair)

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