Food price surge puts India on the back foot

Prices of many foodstuffs are surging in India, despite a good start to monsoon rains - an unexpected boon for wholesalers, but a major headache for the central bank and a government hoping for its help to reboot the economy.

Reserve Bank of India (RBI) Governor Raghuram Rajan has cut interest rates three times this year to boost growth, but he has since warned he will not cut again if poor rains drive up prices and threaten his inflation target. Bond and stock traders in Mumbai have been left compulsively checking weather forecasts.

But in a bustling market in Aurangabad, 330 km east of Mumbai, wholesaler Shaikh Sharif does not need to track the monsoon: he says prices will stay high no matter what the rains do.

Standing in a storage room with sacks of produce stacked almost to the ceiling, the 42-year-old is stockpiling garlic and onions, saying unseasonal rainfalls earlier this year and a subsequent heatwave have already hit crops, and farmers won't be able to immediately make up for the shortfall.

"Vegetable prices will rise despite good monsoon rains due to thin supplies," he said, as a book keeper nearby jots figures in a thick ledger. "If the monsoon fails, then there will be an even bigger rally in prices."

Pulses, vegetables and chicken make up 12 percent of India's consumer price index. That means significant price rises will pose a major challenge to the RBI, which this year unveiled the country's first inflation target - keeping consumer price rises between 2 and 6 percent.

A fall in inflation to well within those levels this year has allowed Rajan to cut interest rates by a total of 75 basis points, including a move this month.

He has indicated he will now pause, projecting consumer inflation could rise to about 6 percent by next January, not too far from the 5 percent registered in May.

Economists expect him to stay firm on that stance, though a pause will likely frustrate government and businesses wanting more help for an economy that is struggling on the ground, despite strong official figures.

"This is a new inflation targeting framework which the RBI is trying to implement," said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai. "If inflation goes out of control they will lose credibility, and this whole framework will come under question."