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Rate monster looms as food inflation bites

business Updated: Dec 23, 2010 21:22 IST
HT Correspondent
HT Correspondent
Hindustan Times
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Bad news on food prices could be bad news for industry's borrowing rates.

Government economists are grappling for options to sustain growth, keep prices in check and maintain interest rates at moderate levels to ensure that cost of borrowing for companies do not go up to an extent that it discourages investment.

And their latest worry is that food prices, which touched 12.13% for the week-ended December 11, are revealing a new consumption pattern reflecting the challenges of a growing economy. More persistent and "structural" in nature, this flies in the face of old assumptions in price control.

Economists expect inflation to rise further in the coming months, triggering prospects for an upward resumption in the interest rate hike cycle that the Reserve Bank of India (RBI) had paused in its mid-quarter review last week.

"Inflation is not easing as we would like it to be... Upside risks to inflation are still high," RBI deputy governor Subir Gokarn said on Wednesday.

"We expect inflation to be higher and maintain that the RBI will resume tightening in January," said Rajeev Malik, senior economist with broking and research firm CLSA.

The RBI has raised key policy rates six times so far this year as prices raced into high-double digits, pummelled by a supply crunch in staple items, the latest being onion.

Last week, RBI maintained the repo and reverse repo rates, at which lends to banks and borrows from them, respectively, at 6.25% and 5.25% respectively, raising hopes that interest rates will not get higher.

A higher repo, the rate at RBI lends to lenders, raises the banks' borrowing costs prompting them to raise interest rates for final home, auto and corporate borrowers.

A higher reverse repo — the rate at which RBI absorbs excess cash — means it would suck cash from the system to stymie demand and cool prices.

Protein is in, fat is out, cost is up