Food Inflation in India raise question about Rate Cut Dilemma !

Surging food costs offer the most visible sign of India’s inability to contain price pressures, threatening spending in the world’s second-most populous nation. Even as the nation’s benchmark wholesale-price inflation has eased to below 9 percent after breaching that level most of last year, a recently introduced consumer-price gauge shows how little room the central bank has cut to cut interest rates and spur growth.

India’s consumer-price index climbed 9.47 percent from a year earlier in March as the cost of egg, vegetables, fish and meat products rose, after an 8.83 percent advance in February. Wholesale-price inflation in April was 7.23 percent, with food prices jumping 10.5 percent.

“Consumers are facing high inflation driven by food prices,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. who was rated the top Indian forecaster by Bloomberg for the two years ending August 2011. “Due to the divergence between the consumer-price index and wholesale-price index, the Reserve Bank of India cannot cut rates too aggressively when inflation expectations are so high.”
Swaps Climb

One-year interest-rate swaps, or derivative contracts used to guard against fluctuations in funding costs, have climbed 16 basis points to 8.015 percent since the central bank’s last policy review on April 17, signaling investors pared bets for further reductions in borrowing costs.

Reserve Bank of India Governor Duvvuri Subbarao signaled last month that inflation might limit the room for further cuts after he slashed the benchmark rate by half a percentage point, flagging price risks from the fiscal deficit, energy costs and a weaker rupee.

Wholesale-price inflation unexpectedly accelerated to more than 7 percent in April from a 6.89 percent pace in March. The median of 32 estimates in a Bloomberg News survey was for a 6.67 percent gain. The consumer-price gauge was created in January 2011 and the release for April is due today.
Fastest Inflation

In Europe, Germany and Russia will release producer price data that are forecast to show gains slowed last month, Bloomberg surveys showed. Italy’s industrial orders probably improved in March from a 2.5 percent contraction the previous month, a separate survey showed. The U.S. will release revised figures for factory orders today.

By both consumer and wholesale measures, India’s inflation is the highest in the so-called BRIC group of biggest emerging markets that also includes Brazil, Russia and China. Varma expects the central bank to gradually rely more on the consumer price gauge in deciding policy as the wholesale measure excludes services and mostly reflects manufacturing.

The Reserve Bank lowered the repurchase rate on April 17 for the first time since 2009, to 8 percent, to support an economy that probably expanded the least in three years in the 12 months through March 2012 according to government estimates. The move followed 13 interest-rate increases from March 2010 to October 2011 that sought to tame price pressures in a nation where 75 percent of the people live on less than $2 a day.
’Wrong Time’

“Policy rates are being cut at the wrong time,” said Jay Shankar, an independent economist and political analyst who previously worked for Religare Capital Markets Ltd. in Mumbai. “The RBI’s focus now should be on taming inflation rather than supporting growth.”

Subbarao went against the recommendations of an advisory panel when he cut interest rates by a greater-than-forecast half a percentage point last month, minutes of the committee released this week showed. Four of the six non-central bank members present said the central bank should hold rates, according to minutes of the Technical Advisory Committee on Monetary Policy meeting on April 11. Two members recommended a 0.25 percentage- point cut.

Indian companies’ dollar borrowing costs have surged as policy makers’ inability to cool inflation erodes investor confidence. The rupee fell to a record low this week and global funds have cut holdings of local-currency notes by more than $400 million this quarter after the central bank said Prime Minister Manmohan Singh’s fiscal deficit may stoke price pressures in Asia’s third-biggest economy.
Spending Curb

Vegetable and fruit prices are higher at the retail level than at the farm gate because they are distributed through many stages in between, Shankar said. Prices are buoyant because supplies haven’t increased, he added.

That’s undermining consumer spending, said Paras Bothra, head of research at Ashika Stock Broking Ltd. in Kolkata.

Sales growth for Pantaloon Retail India Ltd. (PF), the country’s largest retailer, is expected to slow to less than 3 percent in the year ending June 30, compared with a 35 percent increase the previous year, according to a Bloomberg compilation of analyst estimates. The company’s shares have fallen 45 percent in the past year, compared with a drop of 11 percent in the benchmark BSE India Sensitive Index.

“If you look at the retail pulse for this quarter, it has been very sluggish all across,’ Bothra said. “Purchasing power has gone down quite substantially because of the fact that inflation remains very high, and earnings growth doesn’t remain that great.”
Mango Juice

For Desai, that means forsaking mangoes, priced at 60 rupees a kilogram at the stall she was visiting, and pomegranates costing 150 rupees a kilogram, about double the price at a wholesale market in New Delhi. Green mangoes are used for making pickles and condiments, in cooking with lentils and to make juices.

“Prices of fruits and vegetables have increased so much in the last four to five years, even milk prices are increasing,” she said. “The government keeps saying that inflation will be brought down, but I see no sign of that happening.”
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