Food prices push inflation up, limit RBI's room to act

NEW DELHI Tue Apr 15, 2014 7:57pm IST

A vendor waits for customers next to heaps of green chillies at a vegetable wholesale market along a roadside in the old quarters of Delhi April 15, 2014.  REUTERS/Anindito Mukherjee

A vendor waits for customers next to heaps of green chillies at a vegetable wholesale market along a roadside in the old quarters of Delhi April 15, 2014.

Credit: Reuters/Anindito Mukherjee

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NEW DELHI (Reuters) - Rising food prices drove inflation in India up more than expected in March, reversing a slowdown and leaving the RBI with less room to support the economy amid fresh signs of slowing growth.

The pick-up in inflation, coupled with a slump in industrial output and merchandise exports and the risk of less-than-normal monsoon rains this summer, also calls into question assumptions that the worst is over for Asia's third-largest economy.

Higher prices for fruit, vegetables and milk pushed the annual retail inflation rate up to 8.31 percent last month from a 25-month low of 8.03 percent in February, data from the ministry of statistics showed on Tuesday. Analysts in a Reuters poll had forecast a rate of 8.19 percent.

Annual wholesale price inflation, long regarded as India's main inflation measure, hit a three-month high of 5.70 percent in March on higher food and fuel prices.

A Reuters poll of economists had estimated a 5.30 percent annual rise in wholesale prices compared with a rate of 4.68 percent in February, the slowest pace of increase in nine months.

"There are a number of reasons to think that inflation will ease only slowly over the rest of the year, ruling out any rate cuts in the near term," said Miguel Chanco, India Economist at Capital Economics.

The central bank considers price stability a necessary condition for economic revival and aims to bring down retail inflation to 6 percent by January 2016.

The Reserve Bank of India left its policy repo rate unchanged at 8 percent this month after raising lending rates three times since last September.

"Given the RBI's increased commitment to taming inflation since Raghuram Rajan took over as governor, we expect interest rates to be kept on hold for most of the year," Chanco added.

India has been battling a prolonged spell of high inflation and low growth. While economic growth has almost halved to below 5 percent for the past two years, the worst slowdown for the South Asian nation since the 1980s, retail inflation has been averaging around 10 percent.

A sharper-than-expected cooling in vegetable prices in the past three months had raised hopes of breaking out of that spell. But recent unseasonal hail and heavy rains in parts of the country have damaged crops and driven up food prices again.

Food prices for consumers last month rose 9.10 percent from a year earlier, faster than February's provisional 8.57 percent rise. Wholesale prices for food items, meanwhile, jumped 9.90 percent on year in March compared with an 8.12 percent rise a month ago.

A continuing slump in investment and consumer demand resulted in a surprise 1.9 percent annual contraction in industrial output in February. Exports fell for a second straight month in March, widening the trade deficit to a five-month high.

EL NINO THREAT

Compounding growth worries is an uncertain outlook for summer monsoon rains due to a possible El Nino weather event that affects wind patterns and can trigger both floods and drought. Australia's Bureau of Meteorology last week predicted that the chances of El Nino developing in 2014 now exceeded 70 percent.

A strong El Nino in India could trigger lower production of summer crops such as rice, sugarcane and oilseeds. In 2009, it turned monsoon rains patchy, leading to the worst drought in nearly four decades which shot annual food inflation up to more than 21 percent.

"(Monetary) policy bias will be for further rate hikes in the second half of FY14/15 when the potential El Nino development and impact on southwest monsoon become more apparent," said Radhika Rao, an economist at DBS Bank. Such a scenario would further compound the challenges awaiting a new government that takes over in New Delhi after national elections in May.

Persistently high inflation has become a feature of the Indian economy in the last five years and is widely expected to haunt the ruling Congress party in the elections which began last week.

The opposition Bharatiya Janata Party's leader Narendra Modi, a hot favourite to head the next government, has been relentless in his attack on the ruling alliance over its failure to cool prices, demanding an apology for "cheating" the country.

Modi says he will create a price stabilisation fund to fight inflation and set up special courts to try those who hoard goods.

(Editing by Jacqueline Wong and Hugh Lawson)

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