RBI may front-load rate increase: Analysts

Food inflation, which has risen for five consecutive weeks to a 23-week high, is expected to impact broader prices and put pressure on the Reserve Bank of India (RBI) to increase interest rates. Some analysts expect RBI to raise rates by 50 basis points (bps) in its third quarter review of the monetary policy on January 25.

Food inflation rose 18.32 per cent in the week to December 25. The fuel price index climbed 11.63 per cent.

“This number reinforces the scenario of a 50 bps rise in January. One has to be prepared for a much larger front-loaded series of rate hikes than what one was expecting, say, a month ago,” said Hitendra Dave, head of global markets, HSBC India, Mumbai. Unseasonal rains have led to a steep rise in prices of vegetables like onion and tomato.

Food inflation is the primary driver of the wholesale price index (WPI) inflation due to the 14.34 per cent weight of food articles in the index. According to analysts, the spurt in vegetable prices is expected to show in the headline number when the December figure is released on January 14.

WPI-based inflation had eased to a 12-month-low of 7.48 per cent in November, after touching 8.58 per cent in October. RBI has projected March-end inflation at 5.5 per cent. RBI is expected to revise its inflation forecast in its third quarter review of the monetary policy.

Some analysts believe RBI will raise interest rates by 25 bps in the January review. Also, the frequency of rate increases will rise from earlier expectations.

“I still think RBI will raise rates by 25 bps and not 50 bps as this price increase seems to be seasonal. However, if the food price inflation sustains, RBI may increase the rate hikes,” R V S Sridhar, president and head of markets, treasury, Axis Bank.

However, mere interest rate hikes may not be the solution for tackling rising food prices. “Food inflation is currently the primary driver of WPI. However, it is not clear if a rate hike will have any immediate impact on food prices, which are more a function of demand and supply and logistical issues,” said Samiran Chakrabarty, regional head of research, India, Standard Chartered Bank.

C Rangarajan, chairman of the prime minister’s economic advisory council, has said if food inflation persists, it will feed into general inflation, requiring monetary action.