RBI rate action eyed as food prices spiral

Excerpts from India Business Hour on CNBC-TV18 Watch the full show » RELATED NEWS Food price inflation surges to 17.47% High inflation needs policy step: C Rangarajan

Food prices in the week-ended November 21 have shot up by 17.47% from their year-ago levels. Week on week, they rose by over 1% pushed largely by a 12% rise in onion prices. This is the sharpest rise in 11 years - that is since 1998. Incidentally that too was a year when onion prices rose. CNBC-TV18's Latha Venkatesh and Vidhi Godiawala report that bond markets now fear the Reserve Bank of India (RBI) may hike not just the cash reserve ratio but also interest rates.

"What was Rs 40 yesterday is Rs 70 today. It's Rs 30 more expensive," says a vegetable vendor at a local market. "Khaane ka kum hogaya hai. Pehle jo 5 kilo leke jaate the, ab 4 kilo lete hai," he adds worryingly.

Food inflation is all set to become a huge embarrassment for the government.  At 17.5% for the week-ended November 21, this is the sharpest rise in food prices since 1998. The standard explanation of the government and the RBI has been that it is because of the poor monsoon and the low kharif.

Sujan Hajra, Chief Economist, Anand Rathi, "Food prices have been elevated last 12 months despite we reaching a phase of deflation for the overall wholesale price index. This is indication of supply failure," says Sujan Harja, Chief Economist, Anand Rathi. "We had a bad kharif crop, which was 16-17% lower than the previous crop. Also, there is shortage over even fruits and non-kharif vegetables," he adds. "In manufactured food products, sugar is up 40%. It means food inflation is mainly due to supply side

However, some experts say that while poor kharif harvest explains the 13% year on year jump in cereals and the 3% jump in pulses, they can't explain the 100% rise in potato prices, the 30% jump in onion prices and the 29% jump in eggs, meat and fish.

Chances are that higher minimum support price (MSP) and programmes like the NREGS are also responsible. More importantly the high food inflation coupled with the 7.9% GDP growth led to two key policy makers hinting that RBI may have to resort to rate action.

Says C Rangarajan, Chairman, PM's Economic Advisory Council, "The behaviour of food prices is a worry, and if it persists it can affect others like manufacturing inflation, that will require monetary action."

RBI Deputy Governor Usha Thorat, at an event in Delhi, said, "This (high inflation) will weigh on us. Inflation, especially in primary commodities, is a supply-side phenomenon. But we have to reckon with inflationary expectations, high food prices and primary commodity prices. But going forward, one would have to weigh this with the build-up of inflationary expectations."

Bond markets had so far factored in only a trimming of liquidity through a hike in the cash reserve ratio by the rbi. After these statements and the 17.5% food inflation, bond markets have begun fearing a likely rate hike by RBI in January.