India food inflation accelerates to year-high

NEW DELHI Wed Jan 12, 2011 11:20am EST

NEW DELHI (Reuters) - India's food inflation rose for the fifth straight week to the highest in more than a year, reinforcing fears it has spilled over to broader prices and cementing expectations of a January interest rate hike.

But the spurt in prices of many basic foodstuffs has also raised questions over the government's ability to control price rises through monetary policy, with poor infrastructure, hoarding and supply bottlenecks contributing to stubbornly-high food inflation.

Unseasonal rains are officially blamed for pushing up prices of vegetables such as onions and tomatoes, but some commentators point instead to poor agricultural productivity and transport after years of few reforms and weak government investment.

Onion prices, a key food staple for Indian families, rose over 23 percent over the week to December 25.

The food price index rose 18.3 percent in the year to December 25 and the fuel price index climbed 11.6 percent. This compared with 14.4 percent and 11.6 percent annual rises the previous week.

"This number reinforces the base case scenario of a 50 basis point rate hike in January," said Hitendra Dave, Head of Global Markets, HSBC India, Mumbai.

"One has to be prepared now for a much larger frontloaded rate hike series than what one was expecting say a month ago and therefore the entire swap curve should shift upwards,"

Indian swap rates and bond yields rose after data showed a sharp rise in the food price data, cementing expectations for further rate hikes by the central bank in a January 25 review.

The most-traded 8.08 percent 2022 bond yield rose as much as 3 basis points to 8.15 percent after the data while the less liquid benchmark 10-year bond yield rose 2 basis points to 8.10 percent.

The benchmark 5-year swap rose 9 basis points to 7.84 percent and the 1-year swap rose 8 basis points to 7.10 percent.

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.

"While some part of the spike in food inflation is onion-prices driven, it confirms a persistent rise in inflationary pressures on other components," said Deepali Bhargava, economist with ING Vysya Bank in Mumbai.

"Inflation for December is expected to rise to over 8 percent following which we expect the RBI to hike by 25 basis points in January."

PAKISTAN BANS EXPORT OF ONIONS TO INDIA

In a sign of how food inflation could also spill into politics, there were signs of a mini-trade war with Pakistan as India's Trade Minister Anand Sharma called a reported move by Pakistan to ban onion exports to India as "shocking", according to the Press Trust of India.

The ban came after India stopped exports of cotton, hitting Pakistan.

Food inflation, so far mostly domestically driven, comes at a bad time internationally for India.

Global food prices hit a record high last month, outstripping levels that prompted riots and protests in 2008, and key grains could climb further as weather patterns give cause for concern, the U.N.'s food agency Food and Agriculture Organization said.

Finance Minister Pranab Mukherjee has asked state governments to remove supply side bottlenecks and ensure prices of food products like vegetables, meat and fish come down, but previous statements like this often fell on deaf ears.

C. Rangarajan, chairman of the prime minister's economic advisory council, said on Wednesday more action on interest rates may be needed if inflation stays high.

Food articles have a weight of 14.34 percent in the wholesale price index, India's most widely watched gauge of inflation.

Headline inflation had eased to a 12-month-low of 7.48 percent in November after hitting 8.58 percent in October. Consumer Price Inflation in China was 5.1 percent for November.

In a sign the government may be running out of ideas, finance ministry's chief economic adviser, Kaushik Basu, has said monetary and fiscal policy may not be adequate to food inflation and India may have to live with high price rises.

(Additional reporting by Swati Bhat; Editing by Alistair Scrutton)

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