RBI to consider falling food prices in monitory policy review

Jan 12, 2012 |

New Delhi

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The Reserve Bank of India (RBI) on Thursday said that it will take into account the declining food prices while taking a view on the monetary policy which comes up for review later in the month.

"The impact of food prices on (inflationary) expectations is certainly a factor that needs to be taken into account," RBI Deputy Governor Subir Gokarn said here.

Although there is no direct relation between food inflation and monetary policy decisions, he said prices of essential kitchen items do impact inflationary expectations in the economy.

"The role of food inflation is essentially on expectations ... there is no direct link between monetary policy action and food prices," Gokarn said.

Food inflation remained in the negative territory for two consecutive weeks and was (-) 2.90 per cent for the week ended December 31.

The overall inflation in November was 9.11 per cent and Chief Economic Advisor Kaushik Basu said he expects the WPI number to come down below 7.5 per cent in December helped by declining food inflation.

Food inflation accounts for 15 per cent in the overall inflation basket. Overall inflation has been above 9 per cent mark since December 2010.

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".

The Reserve Bank has raised rates 13 times since March 2010 to control inflation by taming demand. It is scheduled to come out with its third quarter policy review on January 24.

The industry wants the Reserve Bank to reduce interest rates with a view to arresting slowdown and boosting industrial growth. The industrial growth which turned negative in October, showed an increase of 5.9 per cent in November.

Food inflation, Gokarn said: “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".

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