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Food inflation at 41-month high; RBI likely to hike repo rate by 25 bps tomorrow

Tuesday, 17 December 2013 - 9:52am IST | Place: Mumbai | Agency: DNA

Food inflation jumped a 41-month high to 19.93% in November fueling expectations of a repo rate hike on Wednesday when the Reserve Bank of India (RBI) unfolds its mid-term monetary policy review.

The repo rate, the rate at which banks borrow money from RBI by pledging government securities, is at 7.75% currently. The central bank had increased the repo rate twice by 25 basis points each in September and October citing inflationary pressures. The markets expect RBI to continue with its anti-inflationary policy stance and increase the repo rate by 25-50 basis points.

The Wholesale Price Index (WPI) that indicates price rise at wholesale level, raced up to 7.52% in November from 7% in October. The rate of WPI inflation in September was revised upwards to 7.05% from the earlier estimated 6.46%. Food inflation at 19.93%, was the highest since June 2010 and mainly led by the rise in prices of vegetables. The Consumer Price Index (CPI) or retail inflation at 11.2% in November (10.2% in October), was also mainly led by rising food prices.

“The RBI is in an unenviable position. Growth impulses remain weak, but it will be very hard for the central bank to look the other way when retail inflation is above 11%,” said Sajjid Chinoy, chief India economist at JP Morgan.

After easing for three months since March, there were hopes that food prices would cool off due to good monsoon. “Seasonal factors can have only a short-lived influence on vegetable or food prices so long as structural factors are not addressed,” said S K Sinha and D K Pant, economists at India Ratings. They said that the key drivers were declining agricultural productivity and bottlenecks in agricultural supply chain. “No wonder, despite two consecutive good monsoon, food inflation has remained at elevated levels,” they added.

One could argue that food inflation is driven by supply-side factors and the impact of RBI’s monetary policy is limited only to the demand-side.

“With inflation expectations already very elevated and rural wage re-accelerating, the risk of inflation getting more generalized is real,” said Chinoy.

In November, prices of fuel and manufactured products also rose by 11% and 2.64% from 10.3% and 2.5% respectively.

“With a weak rupee and rising fuel prices, margins of producers are under stress. The
extent of rising input costs

being passed on to consumers is likely to rise further,” said Crisil economists, Vidya
Mahambare and Anuj Agarwal in a report.

This may not be the last rate hike if the trend continues. “If inflation (WPI) jumps above 8% in the next few months... then more rate hikes could well be possible,” said Deutsche Bank economists, Taimur Baig and Kaushik Das in a report.

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