Food inflation eases, fuel prices rise

NEW DELHI Thu Jan 7, 2010 1:46pm IST

A shopkeeper gestures as he waits for customers at a fruit shop in Mumbai November 12, 2009. REUTERS/Arko Datta/Files

A shopkeeper gestures as he waits for customers at a fruit shop in Mumbai November 12, 2009.

Credit: Reuters/Arko Datta/Files

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NEW DELHI (Reuters) - India's food price inflation eased slightly in late December, but analysts said a rise in fuel prices may elevate headline inflation, maintaining pressure on the Reserve Bank of India (RBI) to tighten monetary policy.

The food price index rose 18.22 percent in the 12 months to Dec. 26, lower than an annual rise of 19.83 percent in the previous week.

Food prices are rising on supply constraints after the driest spell in nearly four decades, followed by floods in some regions that hit crops. Higher government prices paid to farmers are another factor.

The fuel index rose an annual 4.85 percent in late December. The index has risen about 8 percent since the end of March 2009, following an upswing in world crude prices amid signs of a global recovery.

"Correction in the prices of primary articles have been offset by a sharper-than-expected upmove in the fuel, power and light index," said Anubhuti Sahay, an economist at Standard Chartered Bank in Mumbai.

"We don't expect any policy action from the RBI before the January policy review. But at the policy review, we expect a CRR hike of 50 basis points along with a possible rate hike."

The Reserve Bank of India (RBI) has said interest rate policy cannot address inflation caused by supply problems, but has also said it is worried about a spillover to other prices.

Senior government officials have said it is too early to raise interest rates. C. Rangarajan, the prime minister's economic adviser, said on Tuesday some liquidity tightening might be needed to moderate price expectations.

The RBI will hold its quarterly monetary policy review on Jan. 29 and is widely expected to increase the cash reserve ratio (CRR) requirements for banks, but economists are divided on when it will raise interest rates.

Early this week, secondary steel makers Uttam Galva Steels Ltd and Bhushan Steel raised prices of their products on demand recovery and some watchers expect further price increases in the next two to three months.

"Although food prices are easing, they still remain a concern. They may creep into manufacturing inflation, which the RBI needs to monitor," said N Bhanumurthy, an economist with National Institute of Public Finance and Policy.

To see a graph on inflation, please click on

here

Last week, RBI Deputy Governor Shyamala Gopinath said the focus of monetary policy was shifting to managing recovery and containing inflation from fostering growth after the global downturn.

Broader annual wholesale price inflation was 4.8 percent in November. Some economists expect it to reach about 8 percent by the end of the fiscal year in March, well above the RBI's perceived comfort level of about 5 percent.

POLICY DEBATE

India and South Korea are expected to be among the first Group of 20 nations to follow Australia and raise rates.

Some policymakers have said that food prices may drop in coming months and ease the pressure on the central bank to hike rates.

Prices of perishable food items have started coming down on a weekly basis, with the food articles sub-index falling 1 percent to 284.8.

Food prices are politically sensitive in India, as hundreds of millions live on marginal incomes, and the price rises have sparked protests and walkouts in parliament.

The government last week allowed open market sale of wheat at lower prices, and extended a deadline for sugar firms to meet their export obligations for importing sugar.

(Editing by Ranjit Gangadharan)

(For more news on Reuters Money visit www.reutersmoney.in)

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