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Indian inflation returns as food prices surge

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SURGING food prices have driven India into inflation faster than expected, adding pressure on the central bank to speed an exit from easy monetary policy and prompting further government steps to curb price rises.

India’s wholesale price index (WPI) rose by 0.12 per cent in the year to September 5, compared with the previous week’s 0.12 per cent fall and analysts’ forecast of a 0.08 per cent decline, a weekly data release yesterday showed.

The food articles sub-index rose an annual 15.4 per cent, up from the previous week’s 14.8 per cent rise, as a dry spell parched nearly half of India’s districts, hurting summer crops.

In its latest move to check soaring food costs, India’s cabinet yesterday approved an extension of limits on stocks that can be held by traders of sugar, vegetable oil, lentils and rice until September 2010.

“Inflation is already positive again and the Reserve Bank of India faces a real tough task. The governor has said he wants to keep interest rates low till the economy recovers fully, but inflation is galloping and being responsible for inflation, it can’t ignore it,” said Amol Agarwal, economist at IDBI Gilts.

High food prices pose a dilemma for the RBI, which can do little about price pressures caused by supply-side bottlenecks.

Also, the effect of soaring fuel and commodities prices a year ago is poised to recede in coming weeks, as the WPI peaked in the first two weeks of September 2008. If prices held steady between now and the end of October, inflation would still reach three per cent.

Prices of industrial raw materials and fuels, meanwhile, have been rising in recent weeks.

“Much of the increase in inflation is clearly indicative of input cost pressures picking up, and with demand set to recover we should see output prices also picking up with a lag,” said Sonal Varma, economist with Nomura in Mumbai.

“This will clearly mean that the RBI’s concern on inflation is likely to continue and the exit from the current loose policy will depend on how soon growth picks up from here,” she said.

India has taken steps to manage the impact of a poor monsoon, including increasing imports, limiting exports, and clamping down on hoarding.

Private economists expect the central bank to begin retreating from easy monetary policy towards the end of the fiscal year. The first shift could be through withdrawing some of the extra liquidity in the banking system or increasing banks’ reserve requirements, rather than by raising interest rates.

On Tuesday (September 15), RBI Governor Duvvuri Subbarao said inflation was already 5.2 per cent so far this fiscal year and it would accelerate further by the end of March.

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