x Abu Dhabi, UAETuesday 25 July 2017

Indian food prices set to soar

Building Brics: Inflation in India is set to soar above 8 per cent by the end of the year, economists predict.

Prices of fruit and vegetables have started to rise across India due to insufficient rains. Sam Panthaky / AFP
Prices of fruit and vegetables have started to rise across India due to insufficient rains. Sam Panthaky / AFP

Inflation in India is set to soar above 8 per cent by the end of the year, economists predict.

Morgan Stanley has issued a forecast that wholesale price index inflation could hit 8.2 per cent next month, while others are predicting that it could rise even further.

This comes despite an easing of India's wholesale price index, the main gauge of inflation in India, which slowed to 7.45 per cent last month compared to 7.81 per cent the previous month.

Inflation "could rise further until December 2012 due to high food prices, spillover of primary inflation into manufactured products, second round impact of the fuel price hike and high international commodity prices", said Sujan Hajra, the chief economist of Anand Rathi Securities, in a recent research note.

"We expect inflation to peak out at 8.5 per cent by December."

India's central bank has been grappling with a difficult economic mix of slowing growth and soaring inflation levels.

A batch of weak data released recently, including a contraction in industrial production, has brought into focus the continued problems that India's economy is facing, with the rupee weakening to a two-month low last week.

"Given the central bank's guidance for monetary policy stance in its last monetary policy review on October 30, we believe that policy rates will remain on hold until the end of 2012, with easing to start in Q1 2013," Morgan Stanley said. It added that inflation could moderate to between 7 and 7.5 per cent during the first quarter of the next calendar year.

The Reserve Bank of India (RBI) has kept interest rates on hold at high levels despite pressure from industry for a cut, as it has emphasised that inflation remains a concern.

It recently indicated that there could be a rate cut between January and March, when inflationary pressures are expected to subside.

India's wholesale price index fell to a 32-month low of 6.87 per cent in July, but since then it has increased, largely on higher food and energy prices.

A wave of reforms has been introduced by the government in the past couple of months in an effort to try to boost slowing growth and avert a downgrading of its sovereign rating, which it has been warned about by ratings agencies.

"We believe that policy reforms that help to correct the bad growth-mix issue will be key to reviving growth," Morgan Stanley said.

An interest-rate cut this year was unlikely, analysts agreed.

"We believe that the RBI will remain reluctant to cut given the lingering inflation pressures," said Leif Eskesen, the chief economist for India and Asean at HSBC.

"Moreover, it is also still keenly awaiting the announcement or implementation of additional structural policy reform measures and tangible steps to deliver fiscal consolidation."

P Chidambaram, the Indian finance minister, denied on Sunday that he was at loggerheads with the RBI over interest rates.

"The equation between the government and the central bank in India is the same as the equation between the government and the central bank of any country," Mr Chidambaram told the Press Trust of India.

"It is always arguing for growth on the part of government and arguing for stability and taming inflation on the part of the central bank."

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