Thursday, October 28, 2010

India Food Prices Ease

NEW DELHI -- Food prices in India eased in the week ended Oct. 16 as vegetables and fruits became cheaper, but economists said festival-driven demand will keep inflation high for some more time and lead the central bank to raise its policy rates early November.

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A fruit seller stands by his road side shop in Mumbai on September 16, 2010.

.The wholesale price index for food articles fell 0.7% from the previous week, according data issued Thursday by the Ministry of Commerce and Industry. The year-on-year inflation rate was also lower at 13.75% during the week, compared with 15.53% seven days earlier.

The primary articles index, which includes food articles, fell 0.4% from the previous week, but was 16.62% higher from a year earlier. Fuel prices rose 0.4% week-on-week and 11.25% from a year earlier.

Consumption rises around the festival of Diwali--on Nov. 5 this year--when India\'s majority Hindus gift sweets and buy other articles, including jewelry, consumer electronics and vehicles. The Reserve Bank of India\'s next policy meeting is on Nov. 2.

\"There could be (price) fluctuations for some more time, but a steady decline in food prices would only be seen after the Diwali festivities when the additional demand is completely exhausted,\" said N.R. Bhanumurthy, an economist at the government\'s National Institute of Public Finance and Policy.

By then, the effect of comparisons with last year\'s low base is expected to fade and summer crops are likely to boost food supplies in the market.

Still, the price fall may not be as steep as earlier anticipated due to the government\'s decision to raise the minimum prices given to farmers to procure several farm commodities, especially wheat.

That, along with high manufactured products prices, builds the case for further monetary tightening, Mr. Bhanumurthy said.

He expects the central bank to lift its short-term lending and borrowing rates by 0.25 percentage points each on Nov. 2.

The RBI has raised the rates five times this year to control inflation, as it rolled back its easy policies that helped stimulate growth during the global crisis. It has raised the lending rate by 1.25 percentage points and the borrowing rate by 1.75 percentage points.

Yes Bank Chief Economist Shubhada Rao said food prices are on a clear downtrend, but still remain at elevated levels, strengthening the case for a rate hike by the central bank.

Food inflation in Asia\'s third-largest economy has been uncomfortably high due to supply shortages and excessive rains that damaged some standing crops.

Tuesday, RBI Deputy Governor Subir Gokarn said India is experiencing a food price shock which is structural in nature, highlighting how high food prices continue to fuel inflation.

However, above-average rainfall this year would likely help boost farm output and pull down prices in the next few months.

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