Food price surge puts Rajan on the back foot

By Rafael Nam and Rajendra Jadhav

AURANGABAD, India (Reuters) - Prices of many foodstuffs are surging in India, despite a good start to monsoon rains - an unexpected boon for wholesalers, but a major headache for the central bank and a government hoping for its help to reboot the economy.

Reserve Bank of India (RBI) Governor Raghuram Rajan has cut interest rates three times this year to boost growth, but he has since warned he will not cut again if poor rains drive up prices and threaten his inflation target.

Bond and stock traders in Mumbai have been left compulsively checking weather forecasts.

But in a bustling market in Aurangabad, 330 km east of Mumbai, wholesaler Shaikh Sharif does not need to track the monsoon: he says prices will stay high no matter what the rains do.

Standing in a storage room with sacks of produce stacked almost to the ceiling, the 42-year-old is stockpiling garlic and onions, saying unseasonal rainfalls earlier this year and a subsequent heatwave have already hit crops, and farmers won't be able to immediately make up for the shortfall.

"Vegetable prices will rise despite good monsoon rains due to thin supplies," he said, as a book keeper nearby jots figures in a thick ledger.

"If the monsoon fails, then there will be an even bigger rally in prices."

Pulses, vegetables and chicken make up 12 percent of India's consumer price index. That means significant price rises will pose a major challenge to the RBI, which this year unveiled the country's first inflation target - keeping consumer price rises between 2 and 6 percent.

A fall in inflation to well within those levels this year has allowed Rajan to cut interest rates by a total of 75 basis points, including a move this month.

He has indicated he will now pause, projecting consumer inflation could rise to about 6 percent by next January, not too far from the 5 percent registered in May.

Economists expect him to stay firm on that stance, though a pause will likely frustrate government and businesses wanting more help for an economy that is struggling on the ground, despite strong official figures.

"This is a new inflation targeting framework which the RBI is trying to implement," said A. Prasanna, an economist with ICICI Securities Primary Dealership in Mumbai.

"If inflation goes out of control they will lose credibility, and this whole framework will come under question."

PRICE PRESSURE

Recent data supports the prospect of potential inflation trouble during the monsoon season, which runs from June to September, even as rains have now started to fall in earnest, easing some of the investors' fears.

Average onion prices at Lasalgaon, India's largest wholesale market in Maharashtra, jumped nearly 31 percent in June from the previous month, according to government data.

Meanwhile, prices for pulses - a key source of protein in a largely vegetarian country - and chicken have soared to record highs because of the unusual weather this year.

Amit Magre, a director of Bajrang Pulses and Agro Products, says the production of pulses has been so bad that he's now importing them, and running a single daily shift at his mill compared with three last year.

"Even if we assume monsoon delivers good rainfall, new crop supplies will start from October onwards. Until then, prices will remain elevated," he said.

The government was lauded last year for its efforts to keep a rein on inflation despite lower-than-expected rainfall, a push that largely consisted of releasing wheat and rice from government-run warehouses and cracking down on hoarders.

But it does not have stockpiles of vegetables, chicken and pulses. Importing them is difficult and costly, as pulse production remains low elsewhere, while vegetables and chickens are too perishable.

Any relief would need to come, in time, from production, as farmers respond to price rises by increasing output.

But not all will be able to.

Babasaheb Khole, a pulses farmer from a village outside Aurangabad, said he'd like to increase the area under crop, but couldn't afford the seeds.

"I incurred huge losses due to last year's drought. I couldn't repay the bank loan and now the bank is refusing to give me a fresh loan," he said.

(Editing by Clara Ferreira Marques and Will Waterman)