At a time of debate whether the apex bank would reverse its monetary tightening, the Reserve Bank India (RBI) has said that it will consider the declining food prices while taking a view on the monetary policy, which comes up for review later in the month. RBI Deputy Governor Subir Gokarn said, ‘the impact of food prices on (inflationary) expectations is certainly a factor that needs to be taken into account.’
Gokarn said, the role of food inflation is essentially on expectations, there is no direct link between monetary policy action and food prices, but prices of essential kitchen items do impact inflationary expectations in the economy.
Food prices fell for the second consecutive week as food inflation remained in the negative territory at (-) 2.90% for the week ended December 31, 2011. The fall in the rate of price rise of food items since the first week of November is considerable, as it has plunged from double-digit territory into the negative zone. However, the overall headline inflation in November was 9.11%, remaining above 9% mark since December 2010.Though, Chief Economic Advisor Kaushik Basu said he expects the WPI number to come down below 7.5% in December. Food inflation accounts for 15% in the overall inflation basket.
Gokarn said, ‘increasing affluence is driving significant demand increases, and the fact that inflation or prices are rising quite sharply basically suggest that the supply response is relatively weak.’ By adding further he said, food inflation, as a phenomenon is something to be treated as a persistent source of inflation, with pressure on prices and policy response to it naturally has to be driven in that perspective.
The RBI has hiked interest rates 13 times since March, 2010, to tame demand and curb inflation. In its second quarterly review of the monetary policy in December, the apex bank had said it expects inflation to remain elevated till December on account of the demand-supply mismatch before moderating to 7% by March, 2012. Further, the industry wants the RBI to trim down interest rates with a view to arresting slowdown and boosting industrial growth. The central bank is scheduled to come out with its third quarter policy review on January 24.
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