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Negative is positive for food inflation

Friday, 6 January 2012 - 9:00am IST | Place: Mumbai | Agency: DNA
For the week ended December 24, food inflation was down to (-)3.36% from 0.42% the previous week. The figure was in double digits in November 2011.

If the latest inflation figure is any indication, food prices seem to have stopped biting the aam aadmi. For the week ended December 24, food inflation was down to  (-)3.36% from 0.42% the previous week. The figure was in double digits in November 2011.

This is the first time since 2006 — when the base year for calculation was changed to 2004-05 — that food inflation has recorded negative growth. Leading the fall was a decline of nearly 74% in onion prices. Potatoes, too, were 34% cheaper compared with the same period last year. Similarly, vegetable prices showed a 50.22% decline.

However, hold the cheer. Experts say the fall is on account of a higher base last year than a fall in prices per se. A seasonal factor — improved supply at this time of the year — could also have a role to play.

“We will still see some deceleration in food prices in the next couple of weeks before the base effect peters out after which it will climb slowly,” said Saugata Bhattacharya, senior vice-president, Axis Bank.

The fight against inflation has been a top priority for the Reserve Bank of India (RBI) as is evident from the 13 rate hikes it made since March 2010.
 
Analysts say RBI’s target of 7% headline inflation — inflation based on the wholesale price index which measures changes in prices of different articles on a monthly basis before they reach the retail level — appears more realistic now. Food inflation accounts for about 14% of the entire WPI basket. Many believe inflation will fall below 7% levels and stay there until the first half of this year.

This could be a signal to the RBI to start bringing down key rates. In its monetary policy in December, the RBI said it pushed the pause button mainly on growth concerns. It also dropped hints that it might consider a cut in interest rates to boost growth.

Indranil Sengupta, India economist, DSP Merrill Lynch, expects the central bank to cut the repo rate, or the rate at which the RBI lends money to banks, by 200 basis points in the next financial year. The RBI is expected to come out with its mid-quarter monetary policy review on January 24.


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