Food inflation stays high, RBI rate hike seen

Policy makers have blamed unseasonal rains and supply side bottlenecks for high food prices that have put pressure on a beleaguered coalition government already battling multi-billion dollar corruption cases and an emboldened the opposition.

The government is due to announce a series of measures to contain inflation -- a scourge across the world as food prices return to 2008 crisis levels -- including possible bans on wheat product exports and future trading in some commodities.

India has the highest food inflation of any major Asian economy, but other emerging markets such as China and Brazil are also battling double-digit food price rises.

India's food price index rose 16.91 percent, driven mainly by high vegetable prices, and the fuel price index climbed 11.53 percent in the year to Jan. 1, government data on Thursday showed.

In the previous week, annual food and fuel inflation stood at 18.32 percent and 11.63 percent respectively. Food makes up about 14 percent of the wholesale price index, while fuel contributes about 15 percent.

SOME RELIEF FOR GOVERNMENT?

The figures may signal some relief to the government.

"I do see the beginning of an easing trend in weekly inflation, especially since the spike was caused by onion prices and that seems to be easing now with the arrival of fresh supplies," said N. Bhanumurthy, economist with Delhi based policy think-tank, National Institute of Public Finance and Policy.

Vegetable prices were up 3.84 percent week-on-week and have risen around 71 percent year-on-year. Onions were up nearly 2 percent on the week and 71 percent on an annual basis.

The primary articles price index was up 17.58 percent in the latest week, compared with an annual rise of 20.20 percent a week earlier.

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.

Monetary policy is generally regarded as ineffective in tackling supply led inflation in food. However, the Reserve Bank of India (RBI) is widely expected to tighten policy in its Jan. 25 review as food inflation has spilt over to the broader economy.

India's central bank, which raised interest rates six times in 2010, is expected to increase rates by at least 25 basis points on Jan. 25, a Reuters poll showed on Wednesday. Analysts forecast rates to rise by 75 basis points in 2011.

"I don't think this will change RBI's inflation equations. However, the only downside of a spike in food prices is that the RBI may signal to the markets that we may not be nearing the peak of the interest rate tightening cycle," said Bhanumurthy.

Following a series of rate hikes by the central bank and tight liquidity conditions, banks have raised their deposit rates by up to 100 basis points last month and lending rates by up top 75 basis points.

In a recent pre-policy meeting with central bank deputy governor Subir Gokarn, bankers expressed concern over liquidity conditions and the lukewarm pace of deposit growth, despite increases in retail deposit rates and their growing reliance on wholesale deposits at higher rates to fund a robust loan growth.

"We have analysed the situation. We have indicated what further steps we are going to take. We have also indicated there could not be any unnecessary panic," said Finance Minister Pranab Mukherjee.