Food inflation to impact RBI rate review

New Delhi: Reserve Bank of India (RBI) is looking to cover wider effects of an increase in food prices as Governor Raghuram Rajan showed his concerns regarding the inflation, two weeks prior to his final policy assessment for 2015.

The rise in prices of food products and its firm demand during the festive season pushed India’s retail inflation northwards. It reached a four-month high in October. To curb the inflation, Rajan is expected to cut the interest rates in the RBI rate review next month.

The task in front of the government and RBI is to avoid awage hike spiral” as it can result into higher food costs. It will make up for approximately half of India’s consumer prices basket. To find solutions, other prices have to be regulated to avoid that condition, even if that means curbing growth, said Rajan in an interview to a news channel in Hong Kong on Friday.

“We are not really targeting that first round effect on food, we are worried about the second round effect on wages and trying to make sure that is contained, if unfortunately that sometimes means slower activity,” said Rajan.

He also pointed out the foremost apprehension with Asia’s third-largest economy, is the weakness of investment, although he appreciated the government’s initiatives to bring the public sector investments back on track.

The report is due to be realised on December 1. It will review the product rates as inflation is increasing as a result of swelling prices of lentils and onions.

RBI dropped interest rates four times to 6.75% this year, assisted by a decline in global product rates. In an earlier interview, Rajan said that the 5% inflation objective could be achieved with the current monetary policy, which was “just right” at that moment.

The RBI rate review in December remains a remote possibility to seek improvement in the inflation, as it would assess the issues and deliver a progressive policy.