Food inflation dips, but RBI may not cut key rates

The falling cost of vegetables like potatoes and onions has put a lid on price rise, with food inflation confined to the negative zone for the third consecutive week at (-)0.42% during the seven-day period to January 7.

However, experts feel that the decline in prices of food articles will not be enough to prompt the Reserve Bank to cut key interest rates at its forthcoming monetary policy review on January 24.

Food inflation, as measured by the wholesale price index (WPI), stood at over 16% in the corresponding week of the previous year. It was (-)2.90% in the previous week ended December 31, 2011.

The maximum drop was witnessed in prices of onions, which became cheaper by 75.42% year-on-year during the week under review, while potatoes became 23.84% less expensive. Overall, vegetables became 45.81% cheaper, while wheat prices fell by 3.57%.

The decline in food prices since the first week of November has been substantial, with the rate of price rise plummeting into the negative zone from double digits.

"Food inflation may remain in the negative zone for another two weeks before turning positive to low single-digit," Crisil Chief Economist DK Joshi said.

However, the time is not yet right for the RBI to start loosening the monetary policy, he said.

"While food inflation has moderated, there are major components like manufactured products where prices continue to rise at a high level. We believe the RBI will wait for some more time before starting to cut rates," Joshi said.

General inflation stood at a two-year low of 7.47% in December, mainly on account of falling food prices.

After raising interest rates by 375 basis points since March, 2010, the RBI took a pause on its hawkish stance in December.