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Thursday, December 24, 2009

Rise in food prices strengthen case for RBI action

Food prices rose nearly 19 percent annually in mid-December, reinforcing the case for the Reserve Bank of India (RBI) to withdraw excess liquidity in January to stem inflationary expectations.

Food prices have been surging after the driest spell in nearly four decades and flooding in some parts of the country hurt crops and pushed up food prices.

Government data showed on Thursday that food prices rose 18.65 percent in the year to Dec. 12, slightly lower than the 19.95 percent annual rise a week earlier.

"Even though the current food inflation is due to supply side shocks, it will spill over to other sectors. In that scenario, monetary measures are important to stem inflationary expectation," said N.R. Bhanumurthy, an economist with the National Institute of Public Finance and Policy.

"A hike in cash reserve ratio (CRR) will make sense. We expect it to be raised by 50 basis points by January policy," he said.

The benchmark 10-year bond yield was steady at 7.71 percent after the data.

The fuel index rose an annual 3.95 percent in the 12 months to Dec. 12, as the statistical aberrations caused due to price spikes of 2008 faded out.

Monthly price data for November showed manufacturing prices rose an annual 4 percent, a sign a growing economic recovery is allowing firms to pass on higher costs.

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