UPDATE 2-India food inflation accelerates to year-high

* Food inflation accelerates for fifth straight week

* Vegetable prices, including onion prices shoot up

* Swap rates, bond yields rise on inflation data

(Adds comment, market reaction, global context,
background)

By Abhijit Neogy

NEW DELHI, Jan 6 (BestGrowthStock) – India’s food inflation
accelerated for the fifth straight week to the highest in more
than a year, reinforcing fears it has spilt over to
broader prices and cementing expectations of a rate increase
in January .

Unseasonal rains have pushed up prices of vegetables such
as onions and tomatoes in recent weeks. Onion prices rose over
23 percent over the week to December 25.

The food price index rose 18.32 percent in the year to
Dec. 25 and the fuel price index climbed 11.63 percent. This
compared with 14.44 percent and 11.63 percent annual rises the
previous week.

“This number reinforces the base case scenario of a 50
basis point rate hike in January. One has to be prepared now
for a much larger frontloaded rate hike series than what one
was expecting say a month ago and therefore the entire swap
curve should shift upwards,” said Hitendra Dave, Head of
Global Markets, HSBC India, Mumbai.

Indian swap rates and bond yields rose after data showed a
sharp rise in the food price data, cementing expectations for
further rate hikes by the central bank in the upcoming Jan. 25
policy review.

The most-traded 8.08 percent 2022 bond yield
rose as much as 3 basis point to 8.15 percent
after the data while the less liquid benchmark 10-year bond
yield rose 2 basis points to 8.10 percent. The benchmark
5-year swap rose 9 basis points to 7.84 percent
and the 1-year swap rose 8 basis points to 7.10
percent.

India’s central bank, which raised interest rates six
times in 2010, is expected to increase rates by at least 25
basis points on Jan. 25 when it reviews policy, a Reuters poll
showed on Wednesday.

Analysts forecast rates to rise by 75 basis points in
2011. [ID:nBM]

“While some part of the spike in food inflation is
onion-prices driven, it confirms a persistent rise in
inflationary pressures on other components,” said Deepali
Bhargava, economist with ING Vysya Bank in Mumbai.
“Inflation for December is expected to rise to over 8
percent following which we expect the RBI to hike (interest
rates) by 25 basis points in January.”

FOOD PRICES AT RECORD HIGHS:FAO
Global food prices hit a record high last month,
outstripping levels that prompted riots and protests in 2008,
and key grains could climb even further as weather patterns
give cause for concern, the UN’s food agency Food And
Agriculture Organisation said.
Its measure of global monthly price changes for a
food basket of cereals, oilseeds, dairy, meat and sugar
reached its highest since records began in 1990, topping
levels in 2008 when a food crisis sparked riots in some
countries.
C. Rangarajan, chairman of the prime minister’s
economic advisory council, said on Wednesday more action on
interest rates may be needed from the central bank if
inflation remains sticky. [ID:nBMA009266]

Food articles have a weight of 14.34 percent in the
wholesale price index , India’s most widely watched
gauge of inflation, and the spurt in vegetable prices is
expected to show up in the headline number when December data
is released on Jan. 14.

Headline inflation had eased to a 12-month-low of 7.48
percent in November after hitting 8.58 percent in October.
Consumer Price Inflation in Asia’s largest economy, China
was 5.1 percent for November.
The finance ministry’s chief economic adviser,
Kaushik Basu, has said monetary and fiscal policy measures may
not be adequate to tackle sector specific price rises and the
country would have to live with such price rises.

The government will not increase diesel prices for now,
the oil minister signalled on Wednesday, as the government
walks a tightrope between reducing the burden of subsidies and
tackling public anger over inflation. [ID:nSGE70403G]

Last week, India deferred a ministerial panel meeting to
discuss a possible increase in diesel and cooking gas prices.

(Additional reporting by Swati Bhat; Editing by Ranjit
Gangadharan)

UPDATE 2-India food inflation accelerates to year-high