Higher vegetable prices push up food inflation

After dipping marginally for a few weeks in a row, food inflation changed tack yet again to move up to 17.40 per cent for the week ended January 16 from 16.81 per cent in the previous week, mainly on account of higher prices of eggs and vegetables.

The official data on wholesale prices of primary food articles and fuels, coming as it did a day ahead of the third quarterly review of credit policy on Friday, dashed all hopes of any early respite from high food inflation which had touched its 10-year peak of close to 20 per cent in December last.

In the event, although the current bout of food inflation is more of a supply-side problem, the Reserve Bank of India is likely to signal a further monetary tightening by hiking some of the key policy rates to suck out excess liquidity and thereby rein inflation.

The general expectation among analysts is that the apex bank would raise the cash reserve ratio (CRR) — the chunk of deposits that banks are mandated to park with the RBI — by at least 50 basis points so as to suck out more than Rs.20,000 crore from the money in circulation. Alongside, there could also be a marginal increase of about 25 basis points in the repo (short-term lending to banks by RBI) and reverse repo (short term borrowing) rates to signal a staggered exit from the soft money policy.

Such a step is deemed necessary as there are chances of the high food inflation seeping into the manufacturing and other sectors and thereby lead to a surge in overall inflation.