December 23, 2010 / 6:35 AM / 9 years ago

Food, fuel prices drive inflation worries

MUMBAI/NEW DELHI (Reuters) - Rising prices in India of fuel and food are reviving worries about inflation and sent swap rates to 26-month highs as expectations grew for more rate increases in Asia’s third-largest economy.

A vendor sprays water on vegetables to keep them fresh at a market in Siliguri July 6, 2009. REUTERS/Rupak De Chowdhuri/Files

India’s embattled government is expected to decide next week whether to increase state-set fuel prices as international crude oil hovered near two-year highs, a move that would have a broader inflationary impact than a decision earlier this month by state-run fuel retailers to lift the price of petrol.

In the year to Dec. 11, India’s food price index rose 12.13 percent, with the price of onions — the country’s most widely-eaten vegetable — of especial concern, while the fuel price index climbed 10.74 percent. This compared with 9.46 percent and 10.67 percent respectively in the previous week.

“Inflation is becoming a problem now. We expect the RBI (Reserve Bank of India) to hike rates sooner rather than later. Now we expect 50-75 basis points of rate hike in the next year, most of which should happen in the first half,” said Manish Wadhawan, director and head of rates trading at HSBC in Mumbai.

Inflation worries are spreading in Asia, with Singapore on Thursday posting November inflation near a two-year high and Chinese consumer inflation for November at a 28-month high.

India could decide to raise diesel and cooking gas prices at a ministerial meeting on Dec. 30 as the government tries to cushion state oil retailers from the pain of crude prices topping $90 a barrel and ease its own subsidy burden.

The wholesale price index , the most widely watched gauge of prices in India, rose 7.48 percent in November from a year earlier compared with 8.58 percent in October.

The Reserve Bank of India, which left rates unchanged this month after six increases since March, has said it expects WPI inflation to ease to 5.5 percent by the end of the fiscal year in March 2011 but also said inflationary risks are to the upside.

“If there is a diesel price hike this month, then there will be a further cascading effect on inflation and the RBI may not be able to attain its 5.5 percent inflation projection,” Wadhawan said.

The RBI’s next policy review is on Jan. 25.

Overnight indexed swaps extended their rise on Thursday, with the benchmark five-year swap rate touching a fresh 26-month high.

Bond yields have also reached their highest levels in more than two years in recent sessions.

ONIONS AND DIESEL

Price pressure have re-emerged at the same time the government is locked in the worst standoff with the opposition in decades over investigating a slew of corruption cases, deadlocking politics and virtually stalling policymaking.

On Thursday, government officials vowed that steps they were taking to ease the surge in food prices would have an effect.

“We will certainly do whatever is required to bring down prices of onions,” Cabinet Secretary K.M. Chandrasekhar said.

A day earlier, opposition-driven protests over corruption and high food prices choked parts of India’s capital.

The price of onions jumped nearly 350 percent early this month before easing after the government stepped in to ban exports and scrap import duties. But prices are still double what they were at the end of November.

High food inflation, which has helped dislodge state governments in the past, is a worry for the ruling Congress party ahead of several state elections next year.

India’s primary articles price index was up 15.35 percent in the latest week compared with an annual rise of 13.25 percent a week earlier, data on Thursday showed.

Last week, retailers raised petrol prices — which were deregulated in June — by nearly 6 percent.

Any rise above 2 rupees (4.4 cents) a litre in diesel must be approved by a ministerial panel, India’s oil secretary told CNBC TV on Thursday.

(Additional reporting by Rajendra Jadhav, Swati Bhat, Krittivas Mukherjee, Abhijit Neogy and Rajesh Kumar Singh; editing by Stephen Nisbet)

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