Food inflation flares up at nearly 20%

Last time around, the UPA government managed to emerge largely unscathed despite its inability to reign in spiraling prices. But, this time it appears to be a little different, with most opposition parties closing ranks to pile up the pressure on the Government on the issue of rising food prices. For its part, the Government said that it was also concerned by the sharp jump in food prices and partly blamed the drought and floods. It also assured that it will take steps to contain inflation, including imports. An early hike in interest rates by the Reserve Bank of India (RBI) also seems to be on the cards, especially if prices don't show any sign of easing in the coming days and weeks. This was suggested by C. Rangarajan, the former RBI governor and the chief of the Prime Minister's economic advisory council.
Food prices rose 19.95% in the year to Dec 5, picking up from a 19.05% rise a week earlier, weekly data showed, rising at a time when there is normally a seasonal dip. The data reinforced expectations that the central bank could tighten the monetary policy before its scheduled policy meeting at the end of January. "Food prices are going up, this is an area of concern. We have to take some appropriate measures... but best could be done by augmenting supply through imports," Finance Minister Pranab Mukherjee said. Containing inflation is high on the Government's agenda and it is monitoring the price situation, the Finance Minister said.
Even prices of non-food manufactured products are expected to rise as the Indian economy picks up pace. Supply-side inflation could turn into demand-side inflation. Monthly data for November showed manufacturing prices rising at an annual rate of 4%, a sign that companies have regained the pricing power on the back of the faster than anticipated economic recovery. The annual wholesale price inflation, which stood at 1.34% in October, rose to 4.78% in November, and it could reach 7-8% by the end of the fiscal year in March, above the RBI's forecast of 6.5%. Most economists expect a 50 basis points hike in the CRR, probably before the January policy meeting while policy rates may be revised up in the regular policy meeting.
RBI Governor D. Subbarao has said that monetary policy is not the right tool to fix supply problems, particularly in essential food items. However, he has also noted the risk that if soaring food prices are factored into expectations for other prices it would create inflation pressures through the economy. Even if there is some tightening by the RBI, it is unlikely to make a major dent in the overall economic activity. Hence, we don't expect any tightening to have a serious impact on credit growth or economic growth as policy rates are still far below their long-term averages.