India's WPI falls, food prices surge on poor monsoon

India's wholesale price index fell in the year to August 8 for the tenth week in a row, but drought-like conditions continued to push up food prices and broader inflation is expected by economists to rise sharply in coming months. The widely watched wholesale price index fell 1.53 percent in the 12 months to August 8. That compares with a 1.74 percent decline in the prior week and a market forecast for a decline of 1.49 percent.
The food articles index surged 10.5 percent compared with a year ago as a weak monsoon hit crops. It was the second week in a row that the food price index saw growth of at least 10 percent. "Going forward we could see negative numbers for another month or so and they will slowly become positive," said D.K. Joshi, principal economist of CRISIL.
"The impact of the poor monsoon will show up later with food prices which have anyway spiked." The market was unmoved by the data, with the benchmark stock index holding on to earlier gains of 1.75 percent, unchanged from before the data release. The benchmark 10-year bond yield was also unchanged at 7.22 percent.
Analysts say government action is now needed to tame rising food prices caused by insufficient rainfall as monetary policy cannot tackle supply-side bottlenecks. At a policy review last month, the central bank revised up its inflation outlook for the fiscal year ending March 2010 to 5 percent from 4 percent.
It left the key policy rate unchanged after having slashed the rate by 425 basis points between October and April. "The Reserve Bank of India's dilemma continues with co-existence of elevated prices and inflationary expectations as well as the need to maintain comfortable liquidity - perhaps for longer duration than earlier envisaged, given the impact of drought on the economy," Shubhada Rao, chief economist with Yes Bank, said.
"We believe that the probability of rate hike gets lower in the current fiscal year." A poor monsoon and a possible decline in farm output could drag down overall growth in Asia's third largest economy in 2009/10 (April/March). The economy grew 6.7 percent in 2008/09 (April/March), slower than 9 percent in the previous year, and the central bank has forecast 6 percent growth in 2009/10 with an upward bias.