Tells banks monetary tightening will continue; food inflation nears 10%.
Food inflation accelerated significantly in the week ended July 30 because of simmering price pressures in several commodities, even as the Reserve Bank of India damped down hopes of a pause in rate increases at an informal interaction with top bankers in Mumbai on Thursday. State Bank of India Chairman Pratip Chaudhuri told reporters after the meeting: “The RBI has said it will continue doing what it is doing... that it will continue raising the policy rates till the time inflation comes down to 7 per cent. It has said inflation data need to be seen. If inflation comes down, it will pause. But, if it remains stubbornly high and close to two digits, it will continue the hike.”
This dashed hopes of industry chambers, which on Thursday asked the central bank not only to halt monetary tightening but reverse it.
The year-on-year food inflation rate accelerated to 9.90 per cent —the highest in three months — from 8.04 per cent in the preceding week. Even the high base of 16.45 per cent at this point of time last year could not arrest the rise in food inflation, showing heavy inflationary pressures in the economy.
The markets reacted negatively to the news as 10-year bonds declined, snapping a seven-day advance. Yields on the most traded government debt due 2021 climbed from a three-month low.
The Bombay Stock Exchange Sensex fell 0.4 per cent after choppy trading on Thursday, as the inflation data triggered expectations the tightening cycle would continue.
Meanwhile, steep increases were seen in the prices of vegetables, particularly onions. Inflation in onions rose to 36.62 per cent during the week ended July 30 from 26.36 per cent in the previous week. Surging onion prices in December 2010 had catapulted food inflation to double digits. That had forced the government to rationalise duties on this item and constitute an inter-ministerial group to suggest ways to cool inflation.
Inflation in non-vegetarian items such as eggs, meat and fish doubled to 13.44 per cent for the week ended July 30 from 6.66 per cent a week before. Fuel and power inflation remained steady at 12.19 per cent. Overall inflation stood at 9.44 per cent in June. The numbers for July will be released next week.
Kislay Kanth, head of research, MAPE Securities, said, “The data for July inflation will be important and its course would determine the RBI response on rates. We expect inflation to stabilise around 9.5 per cent for July and start falling from August.”
But, many economists said it would be difficult for the central bank to continue with its hawkish monetary stance. "Inflation numbers are up and now the RBI would be in a tight spot. The US Federal Reserve has said it will maintain a low interest regime for the next two years and the industry numbers would start showing a slowdown in the second quarter. This means pursuing an aggressive monetary policy to contain inflation will be difficult," they say.
An RBI survey released on Thursday said urban households expected inflationary pressure to sustain through this financial year and the first quarter of 2012-13, and feel there may not be any softening of food prices. While the June 2012 household inflation is expected to be 12.9 per cent, up from 12.7 per cent perceived for March 2012, daily-wage workers and housewives expect higher inflation rates to continue.
