It’s perhaps time for a second green revolution as India grapples with high food prices
By John Satish Kumar
MUMBAI (MarketWatch) — All eyes are on India’s central bank, which meets Tuesday to decide on policy rates.
It’s a foregone conclusion that it will hike both the repo and reverse repo rates.
The question which remains unanswered is how much will Reserve Bank of India Governor Duvvuri Subbarao further tighten the screws.
A Dow Jones Newswires poll of 16 economists and treasurers expect the Reserve Bank of India to raise the repurchase rate, or lending rate, by 25 basis points to 6.50%.15 expect a similar hike in the reverse repurchase, or borrowing, rate, to 5.50%, while one is calling for a 50 basis-point hike in the borrowing rate. Most, however, won’t be surprised if the quantum of tightening is higher.
India’s Wholesale Price Index based inflation rose to 8.43% in December from 7.48% in November, mainly due to an 8.6% rise in food inflation from 6.1% in November.
Higher vegetable prices due to extended monsoon rains, which destroyed some crops, along with increased prices of spices, fibers and minerals led to this steep jump.
Looking forward, the picture isn’t very pretty either.
Vegetable prices aren’t rising as fast as they did in November and December, but they have stayed stubbornly high.
Higher raw material costs pressures are squeezing manufacturer’s margins and they are expected to respond by passing on the cost to the consumer.
With crude flirting with the $100 a barrel mark, a price hike in diesel is still pending, which could further fuel food prices.
Rising inflation expectations and the announced hike in rural wages should only reinforce the wage-price spiral.
Investors, cognizant of the inflation bogey, have been on the sell side. The Bombay Stock Exchange’s benchmark Sensex (XX:SENSEX 19,161, +153.75, +0.81%) has fallen over 11% since the Nov. 5 high of 21,108.64.
Foreign investors, who pumped in a record $29.36 billion into Indian equities in 2010, have already withdrawn over $762 million so far in the year.
To be sure, food inflation is hardly exclusive to India.
International food prices are rising as fast as they did in 2007/08 at the height of the previous bubble.
