Country's annual food inflation eased in mid-October, but it remains stubbornly high and will feed into wider headline inflation to keep pressure on the central bank to raise rates at its Nov 2 review. The food price index in the year to Oct. 16 rose 13.75 per cent, compared with 15.53 per cent in the previous week, as prices of vegetable prices fell.
Food inflation has remained in double digits for around three months despite government predictions it would fall towards the end of the year and there are signs ministers are increasingly resigned to higher inflation.
"The direction is very clearly welcome, but you need to see a proper reduction in the number. The level still remains a cause for worry," said Shubhada Rao, chief economist at Yes Bank.
"We do see a small rate hike on Nov 2 of 25 basis points and then an extended pause."
The five year swap rate fell 2 basis points to 7.20 per cent following the data on easing food inflation.
The fuel price index for the same week rose 11.25 per cent against an annual rise of 11.14 per cent. The primary articles price index was up 16.62 per cent.
Subir Gokarn, a deputy governor at the Reserve Bank of India (RBI), on Tuesday called high food prices a structural problem and warned rising prices would put upward pressure on inflation and interest rates.
Finance Minister Pranab Mukherjee on Tuesday said 4-5 per cent inflation is "ideal" for the country's economy, but admitted achieving that level might be difficult.
Higher food prices have already pushed up headline inflation to 8.62 per cent in September from 8.5 per cent a month ago, compared with the RBI's comfort zone of 5-6 per cent.
While monetary tools by themselves cannot deal with high food prices, they can help to tamp down demand in the economy and keep a lid on inflationary pressures.
The RBI is widely expected to raise its key lending rate by 25 basis points, the sixth such hike since March, when it meets to review policy on Nov. 2, as it looks to achieve its end-March projection of headline inflation at 6 per cent.
Food prices were expected to cool following normal monsoon rains and improved supplies, but so far have belied that optimism, putting at risk hopes for a substantial easing in headline inflation by end-December.
To control food prices, the country has allowed duty-free import of rice and wheat and has released grains from its stocks.
The ruling Congress party, which faces several crucial state elections in 2011 and 2012, is under political pressure for not controlling food prices in a country where over 40 per cent of the population live on under $1.25 a day.
In 1998, voter anger over a spike in onion prices helped the Congress wrest three states from the opposition Bharatiya Janata Party (BJP). A similar rise in 1980 contributed to the fall of Janata Party federal government.
The ruling coalition government admits high inflation as a major policy challenge, but critics say its policies to deal with prices are hamstrung by its obsession with economic growth.
But as the industrial output data for August showed high inflation is threatening to choke off the domestic demand driven economic growth by impacting consumer spending.