India signals policy action on rising food prices

Gokarn is the second official in as many days to flag concerns over accelerating inflation after Prime Minister Manmohan Singh's economic adviser on Dec. 3 said rising food prices may “require monetary policy action.” The wholesale food-price index climbed to an 11-month high in November, a government report showed this week.

“Persistently rising food prices may spill over into inflation expectation” and “do have an expectation impact,” Gokarn told reporters in New Delhi today. “We can't ignore that linkage.”

India's gross domestic product expanded 7.9 percent in the three months to Sept. 30 from a year earlier, the fastest pace in six quarters, as a US$130 billion cash injection through monetary stimulus shielded the US$1.2 trillion economy from a global recession. China grew at a faster pace of 8.9 percent last quarter, while U.S. GDP rose 2.8 percent, Europe contracted 4.1 percent and South Korea increased 0.9 percent.

“With strong GDP growth and rising inflation, we think the pressure is rising on the Reserve Bank of India to partially pull back the monetary stimulus,” said Rahul Bajoria, an economist at Barclays Capital in Singapore. Accelerating inflation will likely “trigger action in the form of hikes in the cash-reserve ratio.”

Bonds Drop

Benchmark 10-year Indian government bonds posted their worst week since June as Chakravarthy Rangarajan, chairman of the Prime Minister's Economic Advisory Council said higher food prices may push up wages and manufacturing costs. The Reserve Bank may start raising interest rates as early as January, increasing borrowing costs by 3 percentage points in 2010, Goldman Sachs Group Inc. said in a research report dated Dec. 3.

The index of wholesale primary articles, comprising mainly of food items such as pulses, fruits, vegetables and cereals, rose 12.53 percent in the week to Nov. 21, the highest since November 2008, a government report showed Dec. 3. The central bank forecasts wholesale-price inflation at 6.5 percent by March 31 from 1.34 percent in October and 0.5 percent in September.

India needs to ensure that the economic recovery isn't hurt while keeping inflationary pressures under control, Gokarn said today.

“There's nothing off the table but all options have to be considered with the information that is available to us,” Gokarn said when asked if the central bank may consider raising the cash-reserve ratio.

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