Food prices rise as inflation hits Indian market
By siliconindia   |   Thursday, 17 September 2009, 22:07 IST
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Bangalore: Rising prices of food have driven India into inflation faster than expected, adding pressure to make a fast exit from the easy monetary policy and prompting further government steps to curb price rises, reports Reuters. India's wholesale price index rose by 0.12 percent in the year on September 5, compared with the previous week's 0.12 percent fall and analysts' forecast of a 0.08 percent decline, a weekly data release on Thursday showed. The sub-index of the food articles rose an annual 15.4 percent, up from the previous week's 14.8 percent rise, as a dry spell affected nearly half of India's districts hurting summer crops. The Indian cabinet has approved an extension of limits on stocks which can be help by traders of sugar, vegetable oil, lentils and rice till September 2010. "Inflation is already positive again and the Reserve Bank of India (RBI) faces a real tough task. The governor has said he wants to keep interest rates low till the economy recovers fully, but inflation is galloping and being responsible for inflation, it can't ignore it," said Amol Agarwal, Economist, IDBI Gilts. The RBI can do a little about the high food prices, which is caused by supply side bottlenecks. The effects of soaring fuel and commodities prices a year ago is placed to draw back in coming weeks, as the Wholesale Price Index (WPI) peaked in the first two weeks of September 2008. If prices held steady between now and the end of October, inflation would still reach 3 percent. However, the prices of industrial raw materials and fuels, meanwhile, have been rising in recent weeks. "Much of the increase in inflation is clearly indicative of input cost pressures picking up and with demand set to recover we should see output prices also picking up with a lag," said Sonal Varma, Economist, Nomura, Mumbai. "This will clearly mean that the RBI's concern on inflation is likely to continue and the exit from the current loose policy will depend on how soon growth picks up from here," said Sonal. India has taken necessary measures to manage the impact of a poor monsoon including increasing imports, limiting exports and clamping down on hoarding. Private economists expects the central bank to start retreating from an easy monetary policy by the end of the fiscal year. The first shift could be through withdrawing some of the extra liquidity in the banking system or increasing banks' reserve requirements, rather than by raising interest rates. The government informed that food stocks are adequate to counter the drought situation, as it could also import food to meet demand. RBI Governor Duvvuri Subbarao has made it clear the RBI would not unwind its accommodative policy until recovery in Asia's third largest economy was secured. "RBI will tighten only after there is a decisive upturn in the economy," said D.K Joshi, Principal Economist, Crisil. The economy grew 6.7 percent in 2008-2009, slower than rates of nine percent or more in the previous three years, and policy makers expect it to slow towards six percent in 2009-2010 due to lower farm output.