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Food inflation accelerates for 2nd straight week

Food inflation accelerated for the second straight week on rising prices of onions and petrol, putting pressure on headline inflation and reinforcing expectations of more monetary action this year to tame inflationary expectations.

business Updated: Feb 04, 2011 01:41 IST

Food inflation accelerated for the second straight week on rising prices of onions and petrol, putting pressure on headline inflation and reinforcing expectations of more monetary action this year to tame inflationary expectations.

Food inflation accelerated to its higest level since Dec. 25 on high prices of onions and petrol in the week. Onion and petrol prices were up more than 6.5% and 4.5% on the week.

The food price index rose 17.05% and the fuel price index climbed 11.61% in the year to Jan. 22, government data on Thursday showed. In the prior week, annual food and fuel inflation stood at 15.57% and 10.87%. The primary articles price index was up 18.44% in the latest week, compared with an annual rise of 17.26% a week earlier.

Headline inflation had accelerated in December to 8.43% after food inflation reached a one-year high of above 18% in late December. http://www.hindustantimes.com/Images/HTEditImages/Images/04_02_biz3.jpg

That prompted the Indian central bank, the Reserve Bank of India, to revise its end March inflation projection to 7% from 5.5% earlier.

Bond yields and overnight indexed swap rates rose after the food inflation number as the continuing rise in food prices kept fear of fresh monetary action from the central bank alive.

The most traded 8.08%, 2022 bond rose 2 basis points to 8.21% after the data.

The one-year benchnmark swap rate rose 2 bps to 7.38% and the benchmark five-year swap rose 3 bps to 7.99% after the data.

"I think onion prices are peaking off and that has been reflected in today's inflation numbers. I think for the week ended January 29, you would see moderating food inflation on the back of easing onion and vegetable prices", said N.Bhanumurthy, economist with Delhi based policy think-tank, National Institute of Public Finance and Policy.

Unseasonal rains during the October-November harvesting season for onions in key growing states of Maharashtra, Andhra Pradesh, Karnataka and Tamil Nadu spoilt much of the summer crop which led to a supply shortage.

Other food crops such as potatoes and tomatoes, which are grown around the same regions, also suffered.

The Indian central bank has raise rates seven times since March to tame inflationary expectations but with little effect.

In a sign that the hikes by the Indian central bank have led to price pressures in the economy, the input price index rose to 66.14 from 64.85 in December, latest data from the HSBC Markit Purchasing Managers' Index showed. Supply side bottlenecks which cannot be fixed overnight have long been blamed for the high food inflation which many policy makers have described as 'structural' as increasing disposable income led to a shift in demand to more protein based food items.

Analysts have called for sweeping reforms in agricultural pricing, storage and marketing as well as land reforms to address the bottlenecks and the forthcoming budget may see increased investment in these areas to increase availablity of food crops.

FUEL PRICE RISK

The government will also be closely watching the political situation unfolding in Egypt and the middle east. India imports marginal quantities of crude from Egypt so no immediate impact on India's oil supplies is expected as of now.

However, with tensions brewing in the Middle East, negative sentiment could push up global crude prices and upset India's fiscal calculations through greater outgo on account of fuel subsidies if the situation were to worsen.

India's biggest oil retailer Indian Oil Corp on Wednesday said it would wait for global crude oil prices to ease before deciding on raising petrol prices, a move aimed at softening the blow of high global oil prices to consumers amid high inflation rate.

However, petrol prices increased almost 5% on the week on the back of a recent increase in petrol prices in January. Indian firms raised the retail prices of petrol by about 4.5% from Jan 16.