Food inflation accelerates, Reserve Bank keeps forecast

The food inflation picked up for the fourth straight week in early February, heightening worries it was driving headline inflation past official forecasts and increasing the chance of the Reserve Bank of India (RBI) pushing up rates.

The RBI, meanwhile, stood by its end-March inflation forecast of 8.5%, and said it expects recent monetary action to help anchor inflationary expectations, with inflation moderating by July.

Food prices rose 17.97% in the 12 months to February 6, after an annual rise of 17.94% in the previous week, data released on Thursday showed.

The fuel price index rose an annual 9.89% in the same week, down from a rise of 10.4% on year the previous week.

Rising prices are a huge headache for the Congress-led government, particularly high food prices that may overshadow government efforts to cut spending and the fiscal deficit in a February 26 budget.

Climbing food and fuel costs along with a pick up in manufacturing prices are expected to push headline wholesale price inflation (WPI) from 8.56% in January to 10% by March, according to some analysts and the chief statistician Pronab Sen.

"It is difficult to precisely predict the roadmap or calibration of inflation number," the central bank governor Duvvuri Subbarao told reporters in Patna on Thursday.

"But taking into account the situation at the end of January and looking ahead to the evolving situation we said 8.5% by the end of March and we stand by that number."

Government bonds showed little reaction to the data given that markets have already priced in a rise in the headline inflation to double digits and a 25 to 50 basis point rise in policy rates in April.

At 1100 GMT, yield on the 10-year benchmark bond  was at 7.86%, lower from its Wednesday close of 7.89%.

"Going forward, food prices will moderate and non-food prices will start putting more pressure on the WPI," said Atsi Sheth, economist with Macro-Sutra.

"The RBI has already anticipated a fairly high headline number mainly on a low base. They will look at month-on-month increase in manufacturing prices and credit growth figure before taking any monetary action."

The central bank is widely expected to raise borrowing rates after it surprised markets last month with a bigger-than-expected rise in banks' cash reserve requirements and given that inflation has already topped its revised end-March forecast of 8.5%.

Inflation in manufacturing picked up to 6.55% from about 5% in December, a sign that inflationary pressures were spreading to other sectors of the economy.

"I do not expect headline inflation to come down near term," said Kevin Grice, an economist with Capital Economics in London.

"Base effects should continue to work through, food price pressures will probably stay high for a time while price pressures from the rapid economic upswing will continue to come through too."

On Wednesday, Union agriculture minister Sharad Pawar said food prices have started to ease and will dip further next month, while finance minister Pranab Mukherjee said higher food prices continue to be a worry.

The government last month ordered the sale of stocked grain and extended duty-free sugar imports by nine months and remained hopeful that higher food supplies would moderate food prices.