The worst dry spell in nearly four decades pushed up food prices in India by an annual 14.5 percent in the week to August 22, adding to worries that wholesale price inflation is poised to accelerate in coming months. The widely watched wholesale price index fell by a smaller-than-expected 0.21 percent in the 12 months to August 22, its 12th successive fall, although the number is distorted by the base effect of last year's high energy prices.
Analysts expect the overall price index to come out of the negative zone sooner than earlier thought, pushing inflation above the comfort zone of policymakers and prompting monetary tightening at the start of next year. "Maybe in another one or two weeks, WPI will be out of the negative zone. I think, WPI will definitely cross 6 percent by March end," said D.K. Joshi, principal economist at domestic rating agency Crisil.
A government panel said this week that wholesale price inflation could rise beyond a 4 to 5 percent comfort level by the end of the fiscal year in March. Montek Singh Ahluwalia, the deputy chairman of a plan panel that advises the government on key policy issues, said food prices may ease by end-March, which would help rein in overall inflation within the comfort zone.
Private economists say WPI could rise even faster, putting the central bank in a tough position given the inability of monetary policy to mitigate price rises driven by supply-side shortages. The WPI figure compares with last week's 0.95 percent annual decline and a market forecast for a decline of 0.87 percent.
Farmers in parts of the country may get a late summer reprieve, however, as rains were near-normal for the third straight week in the seven days to September 2, official sources said, although one said the rain was unevenly distributed. Late rains have helped raise water levels in the country's main reservoirs to 45 percent of capacity, up 3 points in a week.
The food articles index rose 14.5 percent from a year earlier as drought engulfed nearly half India's districts, affecting summer-sown crops and forcing the government to intervene to bolster supplies and crack down on hoarding. Within the food group index, the price of sugar surged 37 percent, grains 12.6 percent and lentils 21.6 percent.
On Thursday, the government allowed millers to sell 1.83 million tonnes of sugar in the open market to raise local supplies before festival season that begins later this month.
The consumer price index, which attaches greater weightage to food items, surged 11.29 percent in July. Summer crops have been hit by the worst rainfalls since 1972. The central bank had flagged concern over price pressures in its July policy review, and raised its inflation forecast for the fiscal year ending March 2010 to five percent from four.
Last month, the central bank said policymakers face a dilemma over the timing and pace of exiting from an accommodative monetary stance, and deficient rains could affect the inflation outlook more than the growth prospects. "It (food price rises) may not entail monetary action soon, but there is a case building for some degree of monetary action by January," said Abheek Barua, chief economist, HDFC Bank.
In July, the central bank held rates steady having slashed the key lending rate by 425 basis points between October and April to help recovery in a fragile economy. A slowdown in the economy had led to a fall in prices of manufactured products and metals from a year earlier, prompting the central bank to keep interest rates benign. But demand has started picking up, as is evident from rising car and sales and cement output. "The week-on-week increase in manufacturing prices is also what we are looking at as this would come into play when it comes to hardening of interest rates," said Atsi Sheth, chief economist of Reliance Equities.
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