Food inflation higher, another RBI hike a given

The Reserve Bank of India is seen hiking key rates by a further 25 basis points next month as food prices continue to be at elevated levels despite a decent monsoon and good agricultural performance.

The apex bank is scheduled to meet on October 25 for the second quarter review of monetary policy.

“Demand for food is running close to total income but supply is growing slowly. Even inputs costs are elevated. For example, fertilisers are correlated with oil prices. That is also pushing food prices,” said Ramya Suryanarayanan, economist, DBS Bank in Singapore.

An index measuring wholesale prices of agricultural products gained 9.13% in the week ended September 17 compared with the previous year, according to commerce ministry data released on Thursday.

In the week ended September 10, food inflation had declined to 8.84% from 9.47% in the previous week.

Economists attribute the surge in food inflation to a change in people’s consumption pattern wherein they are going for more protein-rich items.

“Unless there is a substantial correction in protein-rich luxury items of people, it is unlikely that food inflation will come off substantially,” said Samiran Chakraborty, regional head of research at Standard Chartered Bank.

He said the trend is partially linked to both urban wages and rural wages going up significantly over the last few years.

Indeed, economists seem to agree that food inflation is unlikely to come down structurally.

“On a structural basis, we are not expecting food inflation to come down. Global food supply chains are quite tight and domestic demands are high wherein people are going for protein rich food items. Unless we actually enhance our agricultural productivity, things may not change,” said Indranil Pan, chief economist, Kotak Mahindra Bank.

Wholesale price index-based inflation is also not expected to see a fall for September, which only adds to the RBI’s concern.

“Overall WPI is expected to be flat in August and September. Then, gradually, it will tend to come down and the big movement will be in December where we are expecting the base effect to come in. We earlier expected August inflation to be the peak. But then this currency depreciation happened, which could build in some inflation bias,” said Pan.

In a report on Thursday, Hemindra Hazari and Manuj Oberoi of Nirmal Bang Institutional Equities noted the key takeaways from a meeting with RBI’s deputy governor K C Chakrabarty: “RBI to maintain its hawkish stance on inflation and is willing to sacrifice economic growth in the short term for its broader objective of sustained development in the long run.”

The RBI has already hiked interest rates 12 times since March 2010 to control inflation.

“Unless we see the global situation worsening, we are expecting a rate hike by the RBI by 25 basis points,” said Chakraborty.