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High food prices means RBI won\'t cut rates in a jiffy

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It may be a while before the Reserve Bank of India (RBI) decides to cut interest rates. The central bank is likely to hold rates when it unveils the monetary policy review on September 30 as inflation, especially the food price inflation, continues to be high at 9.42%.

Consumer food price inflation rose to 9.42% in August, up from the previous month's 9.36% increase. On a year-on-year basis, vegetable prices grew 15.15%, while fruit prices recorded the sharpest increase at 24.27%. Cereal prices grew 7.39% in August. The government data also showed price pressures were seen building up in pulses, condiments & spices and milk & milk products. Inflation in each of these categories has been rising for the last three months.

Barclays India economist Siddharth Sanyal said, "We expect the RBI to hold interest rates. Though food price inflation is high, the non-food inflation that constitutes about 50% of the basket is down to 6.9% from 7.4% in the previous month. The rise in food prices, specially on fruits and vegetables, is seasonal; in the longer term, food inflation may also come down as government improves supplies."
Retail inflation, which the central bank tracks for setting lending rates, edged down marginally to 7.8% in August from 7.96% a month earlier, helped by slower annual rises in prices of fuel and clothes. But food prices still remained high.

Ajay Manglunia, senior vice-president, credit and fixed income, Edelweiss Securities, said, "With the asset purchase programme of the US coming to an end in October, the environment getting set for rate reversals and food inflation continuing to be stubborn in India, RBI will have to continue to hold rates so that the inflation comes under control and there is revival in growth."

The economic stimulus programme of the US Federal Reserve, which is down to $15 billion a month now, is coming to an end in October, and the higher GDP growth there is expected to gradually lead to rise in interest rates, making it expensive to borrow overseas, which would in turn keep domestic interest rates tight.

Mohan Shenoy, treasurer, Kotak Mahindra Bank, said there is room for the RBI to let up in the rate front. "Interest rates are going to stay where they are for a prolonged period of time considering that food inflation continues to be higher than RBI's comfort level. Even though crude oil prices have come down to $97 a barrel in the CPI, the weightage of crude and crude based products in less than 5%. With the US preparing for an interest rate hike, India will have to hold on its interest rates until we are certain about the outcome of these actions," said Shenoy.

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