A sharp spike in prices of onions and other vegetables sent headline inflation soaring to a six-month high of 6.10 per cent in August. With this, hopes that new RBI Governor Raghuram Rajan will cut policy rates on September 20 when he presents his first Monetary Policy review, have faded.

Driven mainly by a 245 per cent jump in onion prices, the Wholesale Price Index for August was higher than the 5.79 per cent inflation recorded in July, though lower than 8.01 per cent in August 2012. With cereals up 14 per cent, rice surging 20 per cent and vegetable prices rising 78 per cent year-on-year, food inflation hit a three-year high of 18.18 per cent in August. Egg, meat and fish prices were up 18 per cent.

The WPI figure is worrisome as it comes on the back of a sharp paring of GDP growth figures for this fiscal and the slowing private consumption demand. The weaker rupee and the food price spike can lead to supply shocks. Last week, hopes of a rate-cut were fuelled by a lower consumer price index of 9.5 per cent.

But factoring in the latest inflation and the forex market movements, the existing tight money policy stance can be expected to continue, unless the US Federal Reserve decides to defer the tapering at its two-day meeting starting Tuesday.

The monetary policy stance is expected to remain stable and short-term rates could remain elevated (in the near term), said Shubhada Rao, Senior President & Chief Economist, YES Bank.

Though food prices may start to moderate post October on a good harvest after the bounteous monsoon, price pressure could come from the government plan to hike retail fuel prices by nearly 10 per cent to ease its oil subsidy burden, which has risen with the falling rupee and rising crude prices.

Devendra Pant, Chief Economist, India Ratings & Research, said that overall food inflation is unlikely to decline sharply anytime soon despite the good monsoon. This is due to structural factors driving food inflation.

INDIA INC’s Plea

Blaming high food prices for the inflation, India Inc said the Government must ease supply-chain bottlenecks to address this problem and asked the RBI not to hike interest rates. Ficci Secretary-General A. Didar Singh wanted the Government to address the structural factors affecting food inflation.

srivats.kr@thehindu.co.in

(This article was published on September 16, 2013)
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