Falling food prices will influence monetary policy: Gokarn

As food deflation continued for the second week in a row, the Reserve Bank on Thursday said it would factor in declining food prices while taking a view on the monetary policy later this month, at a time of debate whether the central bank would reverse its monetary tightening.

“The impact of food prices on (inflationary) expectations is certainly a factor that needs to be taken into account,” deputy governor Subir Gokarn said here.

The December figure for overall inflation, widely seen in various circles as a key determinant of RBI’s policy stance, may fall below 7.5 per cent, chief economic advisor Kaushik Basu said. He also said food inflation was likely to remain in the negative zone for at least two more weeks.

Food inflation as a phenomenon, Gokarn said, “is something to be treated as a persistent source of inflation. Persistent pressure on prices and policy response to it has to naturally be driven in that perspective”.

Although there was no direct relation between food inflation and monetary policy decisions, Gokarn said, the prices of essential edible items do impact inflationary expectations in the economy.

“The role of food inflation essentially is on expectations...there is no direct link between monetary policy action and food prices,” he said at a function of think tank Icrier. “Increasing affluence is driving significant demand increases...and the fact that inflation or prices are rising sharply basically suggests the supply response is relatively weak.”

Chief economic advisor Basu said, “I expect overall inflation to be below 7.5 per cent in December. January inflation will be a little over seven per cent and by March-end, inflation will be around 6.75 per cent.”

The CEA also said the recent decline in food inflation numbers would have a positive impact on headline inflation. The latter — comprising price movements in food and other primary articles, fuel and power and manufactured products — has been above nine per cent for a year till November 2011. Food inflation has a 14 per cent share in the wholesale price index basket.

The Reserve Bank has raised rates 13 times since March 2010 to control inflation by taming demand. However, it had maintained status quo at its last policy review in December. It is scheduled to come out with its third quarter policy review on January 24.

The industry has been asking the Reserve Bank to reduce key rates with a view to arresting slowdown and boosting industrial growth.

Ficci president and Marico chairman Harsh Mariwala said, “The fact is that inflation is going down and industrial growth remains fragile. RBI should reduce interest rates as soon as possible to revive investments.”