Food inflation rebounds on November rain, in double digit zone

The drop below 10% was a mirage, after all. Food inflation rebounded past double digits in the week ended December 11 — and that’s not even counting the impact of the stratospheric price of onions yet — to 12.13% from 9.46% a week before that, the commerce and industry ministry said in Delhi on Thursday.

This would mean that the Reserve Bank of India (RBI) will raise interest rate (specifically, the reverse repo) by 25 basis points by end-January to tackle price-rise, said Indranil Sen Gupta, economist with Bank of America-Merrill Lynch.

“December inflation, at a likely 7.9% (data due on January 14), will cross November’s 7.5%,” he said.

“Sure, this is essentially due to the November rain shock pushing up vegetable prices. Yet, RBI governor Duvvuri Subbarao will likely not want to take any chances now. Besides, a 25 basis rate hike is believed to carry little incremental growth risk,” said Sen Gupta.

“The upward trend will continue because vegetable prices have started moving up,” said Abheek Barua, chief economist, HDFC Bank. In the vegetable segment, onion prices are up 33.5% on year.

Wholesale dealers of onions at the agricultural produce market committee yard in Navi Mumbai said prices will touch Rs100 per kg by December-end from the current levels of Rs60-70. 

The shortage is attributed to the depleting stocks due to the unexpected November rains.

Barua also expects a hike in the repo rate and reverse repo rate by 25 basis points in the January-end policy review of the RBI.

But he said food inflation is not the only parameter which the RBI will take into account when hiking interest rates. A fresh increase in interest rates will force banks to raise the rates they charge on loans yet again.

“If the RBI goes for one more rate hike in January, there will be a pressure from banks to hike their base rate. And if that happens, then could be impact credit growth,” said Chaitra Bhat, banking analyst with LKP Securities.

According to Merrill’s Sen Gupta, lending rates should go up 75 basis points in the second half of the next financial year starting April 1, 2011.