* Food prices up 19.95 pct annually as at Dec 5
* Reinforces case for tightening
* Risk of inflation spilling over to broader economy
By Manoj Kumar
NEW DELHI, Dec 17 Indian food prices surged an
annual 20 percent in early December as supply shortages hit,
heightening expectations the central bank is set to tighten
policy to stop a breakout of inflation in the broader economy.
Food prices are jumping because of shortages after crops
were hit by the weakest monsoon rains in 37 years and then
flooding in parts of the country, but the price rises come as
the economy is picking up strength after a dip in late 2008 and
Food prices rose 19.95 percent in the year to Dec 5,
picking up from an annual 19.05 percent rise a week earlier,
weekly data showed on Thursday.
"Seasonality in food prices is not playing this year.
Processed food prices are rising. Prices of non-food
manufactured products such as textile, cement and autos are
rising or going to rise," Nomura economist Sonal Varma said.
"We are now at the turning point where supply-side
inflation could into demand-side inflation. So inflationary
expectations have to be anchored."
For a graphic on food and wholesale price indexes and
policy rates, see: r.reuters.com/pag47g
For a graphic on food prices and their impact on headline
inflation, see: link.reuters.com/jah86g
The data reinforced market expectations that the central
bank would tighten policy as early as January.
The benchmark 10-year bond IN069019G=CC was steady at
7.68 percent after rising 49 basis points since late November,
when data showing the economy grew an annual 7.9 percent in the
September quarter, its fastest in 18 months, boosted the
market's view for a policy tightening.
The one-year swap rate INRAMONMI1Y= was at 5.06 percent,
below a 12-month high of 5.15 percent hit on Wednesday but
still 58 basis points above a 2-1/2-month low hit in late
The government, which has expressed increasing concern at
the rapid rise of food prices, said it may import supplies.
"Food prices are going up, this is an area of concern. We
have to take some appropriate measures... but best could be
done by augmenting supply through imports," Finance Minister
Pranab Mukherjee told reporters.
Food prices are politically sensitive in India and the
government is under pressure from opposition parties and allies
to contain inflation, especially food prices which are hurting
poorer sections in the country.
Monthly price data for November this week showed
maufacturing prices rose an annual 4 percent, a sign the
building economic recovery is allowing firms to pass on higher
The annual wholesale price inflation, which stood at 1.34
percent in October, rose to 4.78 percent in November, and
analysts said it could reach 8 percent by the end of the fiscal
year in March, above the central bank's forecast of 6.5
The Reserve Bank of India cut its main lending rate by 425
basis points between October 2008 and April, slashed the cash
reserve ratio and pumped cash in financial markets to shore
markets and the economy up against the global financial crisis
Analysts expect the first step will be an increase in
banks' cash reserve ratio (CRR) to drain funds from the market.
"By January, we are expecting 50 basis points increase in
CRR. Policy interest rates may be raised in the January
policy," said Nomura's Varma.
Reserve Bank of India Governor Duvvuri Subbarao has said
that monetary policy was not the right tool to fix supply
problems such as food shortages, but has also noted the risk
the soaring food prices were factored into expectations for
other prices, which would create inflationary pressures
throughout the economy.
"I think the central bank has indicated that it is
primarily a supply-side problem. I do not think monetary policy
is an answer to this," said Abheek Barua, chief economist at
India's No. 2 private sector lender, HDFC Bank.
"They will increase CRR only in January."
The central bank holds its next policy meeting in late
January, but it can adjust monetary policy at any time.
It worked closely with the government last year to plan a
joint response to reviving growth, and in recent months has
signalled it was looking to exit is very accommodative policy.
"The RBI governor will do monetary tightening when he
thinks it is needed. For that, I don't think he will be
influenced by the finance ministry," said D.H. Pai Panandikar,
president of independent think-tank RPG Foundation.
(Editing by Alistair Scrutton, John Mair, Kazunori Takada)