RBI set to raise rates after wholesale inflation soars to 7.52%

Policymakers have been grappling with high prices for food staples such as onions and potatoes even after the Reserve Bank of India (RBI) raised interest rates by a quarter percentage point in each of its previous two reviews.

The struggle to beat inflation, despite good monsoon rains this year, shows how India is suffering from longstanding problems with infrastructure and supply chains. High food prices are also becoming a major headache for an embattled government facing elections by May next year. That has saddled the central bank with the difficult task of having to raise interest rates in an economy growing at its slowest pace in a decade, which threatens to further undermine confidence among businesses and investors.

High inflation “means the RBI has to hike rates or lose credibility,” said Dariusz Kowalczyk, senior economist for Asia ex-Japan at Credit Agricole in Hong Kong.

“Rate hikes will not correct food prices,” he added. “The hawkish intention is a mistake, in our view, and will lead to slower growth.”

A Reuters poll, done after the wholesale and retail inflation data, showed 39 of 43 economists expect the RBI to raise the repo rate by 25 basis points to 8.00 per cent. Views had been much more split last week, when more analysts were expecting the RBI to keep rates on hold.

India’s wholesale price index (WPI) climbed 7.52 per cent in November from a year earlier, its quickest pace since September 2012, compared with seven per cent in October, the Commerce and Industry Ministry said on Monday.

A Reuters’ poll of economists had predicted annual headline inflation of seven per cent last month.The data confirms the pernicious impact of food prices, as shown last week when the government said consumer prices rose at their fastest annual pace on record in November, 11.24 per cent from October’s 10.17 per cent.

Monday’s data showed the food price index shot up 19.93 per cent in November from a year earlier, the biggest rise since June 2010.

At times, high food prices have brought down Indian governments, and they were seen as a major factor behind the drubbing suffered by the ruling Congress party in state elections held during the past month.

Beyond Wednesday’s RBI meeting, further rate are likely to depend on the course of inflation, given vegetable prices are expected to start coming down this month, according to analysts. Wholesalers have confirmed that supplies of onions are increasing in the main producer states.

“While food inflation has been the key driver, the forward guidance by RBI would remain biased towards anchoring inflationary expectations and monitoring the food price trajectory,” said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai.

A new quarter-point rate hike would mean RBI Governor Raghuram Rajan, who took over in September, has undone the 75 basis points of cuts made this year by his predecessor Duvvuri Subbarao.