India’s elevated food inflation limits scope for further rate cuts
India’s volatile food prices are yet again posing a sticky inflation problem for its central bank, preventing it from cutting rates as deep as it would like to support a stuttering economy.
After slashing rates five times this year, the Reserve Bank of India (RBI) stunned markets earlier this month by resisting a sixth reduction as many had predicted.
Accelerating inflation is a concern, the RBI said after its decision, while signalling it had room to ease policy further to lift an economy growing at its weakest pace in six years.
Earlier this week RBI Governor Shaktikanta Das reiterated the central bank’s readiness to ease if needed. Yet traders expect price pressures will be a hurdle to pushing down the key repo rate much below the current 5.15 percent over coming months.
Indeed, prices of pulses, meat, eggs and edible oils - big contributors to the recent spike in food inflation - are likely to remain elevated, say traders and industry insiders.
Food inflation in November rose to an almost six-year high and is seen staying around those levels over the next few months.
“Prices of grains such as wheat could start moderating from April onward, but prices of milk, meat and edible oils may remain firm,” said Harish Galipelli, head of commodities and currencies at Inditrade Derivatives & Commodities in Mumbai.
Dairies have raised milk prices by around 5 percent this month due to a drop in supplies. Egg and chicken prices too are seen remaining elevated as production costs have jumped due to rising animal feed prices, said a poultry producer.
A normal monsoon year would have helped cool food inflation, but this year the highest rainfall in 2-1/2 decades followed by untimely rains have damaged the summer-sown crops and delayed planting of winter crops.
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