Chennai: Food price inflation eased for a second consecutive week, data released on Thursday showed, but it still remains high enough to provoke another interest rate increase by the Reserve Bank of India (RBI) next week.
Food inflation decelerated to 15.52% in the week ended 8 January, from 16.91% in the previous week. Onion prices continued to rise at 14.83 % whereas potato and vegetables saw a marginal fall
The increase on an annualized basis is considered serious enough for the RBI, which meets for its next monetary policy review on 25 January, to raise key policy rates as it attempts to lower inflation from stubbornly high levels, although some economists have warned that it risked stifling economic growth estimated by the government to reach 8.75% in the fiscal year ending 31 March.
"The build-up of food inflation will take two months to dissipate. So, it will moderate in January and February and we expect food inflation at 10% to 12% by March," said Abheek Barua, chief economist at HDFC Bank.
The Reserve Bank raised interest rates six times last year in its battle against inflation.
Year-on-year onion price inflation remained at 98.15 %; Prices of pulses, wheat and potato declined by 14.92%, 6.11% and 2.94 %, respectively.
Vegetable and fruit prices remained firm, increasing 65.39% and 15.19%, respectively, over the same period last year. Demand for protein-based foods has been rising steadily over the last few years although there has been no increase in their supply.
Some government policy makers do not favour monetary tightening to douse inflation amid concern that it would slow the pace of economic growth as borrowing costs rise.
“The high inflation in primary articles, particularly vegetables, is more on account of supply side constraints and monetary policy may not be the most suitable intervention to deal with the situation,” commerce minister Anand Sharma said in an open letter to finance minister Pranab Mukherjee this week.
Maintaining that the surge in inflation was “unacceptable,” Mukherjee has promised to meet state finance ministers to discuss the situation.
Bankers have argued against another rate hike. They have instead favoured a reduction in the cash reserve ratio (CRR), or the percentage of deposits that commercial banks have to maintain with the RBI, and the statutory liquidity ratio (SLR), or the percentage of deposits they must invest in government securities.
“Liquidity is very tight now,” said Housing and Development Finance Corp. Ltd chairman Deepak Parekh told reporters early this month. “Currently, banks are borrowing Rs70,000 crore to Rs80,000 crore from the RBI on a daily basis.”
While the market will await the central bank’s policy announcement on Tuesday, it is quite evident that RBI is hard-pressed for choice. For inflation driven by supply-side constraints, just monetary policy will not be enough. As long as the government falls short of formulating long-term reforms in agriculture to meet growing demand, curbing inflation will be a tough task.
“For the Reserve Bank, the challenge is to calibrate monetary policy, taking into account the demands of inflation management and the demand of supportive recovery,” RBI governor Duvvuri Subbarao said addressing students at the Indira Gandhi Institute of Development Research on Monday.
Food inflation decelerated to 15.52% in the week ended 8 January, from 16.91% in the previous week. Onion prices continued to rise at 14.83 % whereas potato and vegetables saw a marginal fall
The increase on an annualized basis is considered serious enough for the RBI, which meets for its next monetary policy review on 25 January, to raise key policy rates as it attempts to lower inflation from stubbornly high levels, although some economists have warned that it risked stifling economic growth estimated by the government to reach 8.75% in the fiscal year ending 31 March.
"The build-up of food inflation will take two months to dissipate. So, it will moderate in January and February and we expect food inflation at 10% to 12% by March," said Abheek Barua, chief economist at HDFC Bank.
The Reserve Bank raised interest rates six times last year in its battle against inflation.
Year-on-year onion price inflation remained at 98.15 %; Prices of pulses, wheat and potato declined by 14.92%, 6.11% and 2.94 %, respectively.
Vegetable and fruit prices remained firm, increasing 65.39% and 15.19%, respectively, over the same period last year. Demand for protein-based foods has been rising steadily over the last few years although there has been no increase in their supply.
Some government policy makers do not favour monetary tightening to douse inflation amid concern that it would slow the pace of economic growth as borrowing costs rise.
“The high inflation in primary articles, particularly vegetables, is more on account of supply side constraints and monetary policy may not be the most suitable intervention to deal with the situation,” commerce minister Anand Sharma said in an open letter to finance minister Pranab Mukherjee this week.
Maintaining that the surge in inflation was “unacceptable,” Mukherjee has promised to meet state finance ministers to discuss the situation.
Bankers have argued against another rate hike. They have instead favoured a reduction in the cash reserve ratio (CRR), or the percentage of deposits that commercial banks have to maintain with the RBI, and the statutory liquidity ratio (SLR), or the percentage of deposits they must invest in government securities.
“Liquidity is very tight now,” said Housing and Development Finance Corp. Ltd chairman Deepak Parekh told reporters early this month. “Currently, banks are borrowing Rs70,000 crore to Rs80,000 crore from the RBI on a daily basis.”
While the market will await the central bank’s policy announcement on Tuesday, it is quite evident that RBI is hard-pressed for choice. For inflation driven by supply-side constraints, just monetary policy will not be enough. As long as the government falls short of formulating long-term reforms in agriculture to meet growing demand, curbing inflation will be a tough task.
“For the Reserve Bank, the challenge is to calibrate monetary policy, taking into account the demands of inflation management and the demand of supportive recovery,” RBI governor Duvvuri Subbarao said addressing students at the Indira Gandhi Institute of Development Research on Monday.
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