Food inflation stays high, rate hike seen

Food inflation eased marginally from a year high but stayed at levels enough to keep pressure on annual headline inflation in December and reinforce expectations of a rates hike by the central bank.

Policy makers have blamed unseasonal rains and supply side bottlenecks for high food prices that have put pressure on a beleaguered coalition government already battling multi-billion dollar corruption cases and an emboldened the opposition. The food price index rose 16.91%, driven mainly by high vegetable prices, and the fuel price index climbed 11.53% in the year to January 1, government data on Thursday showed. In the previous week, annual food and fuel inflation stood at 18.32% and 11.63% respectively. Food makes up about 14% of the wholesale price index, while fuel contributes about 15%. Vegetable prices were up 3.84% week-on-week and have risen around 71% year-on-year. Onions were up nearly 2% on the week and 71% on an annual basis. The primary articles price index was up 17.58% in the latest week, compared with an annual rise of 20.2% a week earlier. The wholesale price index , the most widely watched gauge of prices in India, rose 7.48% in November from a year earlier, compared with 8.58% in October. Monetary policy is generally regarded as ineffective in tackling supply led inflation in food. However, the Reserve Bank of India (RBI) is widely expected to tighten policy in its January 25 review as food inflation has spilt over to the broader economy. India's central bank, which raised interest rates six times in 2010, is expected to increase rates by at least 25 basis points on January 25, a Reuters poll showed on Wednesday. Analysts forecast rates to rise by 75 basis points in 2011. In a bid to curb prices, the government was expected to announce a series of measures on Thursday, including possibly banning wheat product exports, media reported. Other steps may include removing essential commodities from the futures market.