The government’s inability thus far to tame inflation, especially food inflation, will probably leave the Reserve Bank of India with little option but to continue with its monetary tightening stance in its policy review on November 2.
The food inflation is expected to continue to stay at an uncomfortably high level in coming months despite the country positioned to harvest bumper kharif and rabi output in the 2010-11 (July-June) farm season. The kharif crop is harvested in October-November, while rabi is cut in March-April.
On top of expectations of bumper 2010-11 crop output, there is huge overhang of grain stocks in government granaries.
Nevertheless, food inflation is expected to stay above government’s comfort level.
The politically sensitive food inflation, although seen easing, has remained thus far stubbornly high at 15.5% for the week ending October 9.
“It is way above RBI’s tolerance level. RBI will continue with its policy of rate hike,” said Rupe Rege Nitsure, chief economist at Bank of Baroda. A combination of factors such as higher minimum support price for foodgrain, improved living standard and the demand rise in rural India have created demand for not just grains, but for varied food products such as lentils, vegetables and protein products.
“Rural areas have benefited from the economic prosperity seen in the country. Demand for foodgrain, milk, vegetable and protein have gone up. It is a good development,” said Planning Commission deputy chairman Montek Singh Ahluwalia.
It should be fine if prices go up a little bit because of increased demand in rural India, Ahluwalia said.
The government’s decision to increase the MSP of major food crops is yet another reason that has pushed up prices of farm products.
Also, higher MSP for food crops has put more money in the hands of rural people, pushing up demand.
