The Reserve Bank of India (RBI) warned on Tuesday that surging food prices are structural and will put upward pressure on inflation and interest rates.
The RBI is widely expected to raise interest rates by another 25 basis points on Nov. 2 as it continues to battle headline inflation that rose to 8.62 percent on an annual basis in September.
“Persistent price increases in commodities for which there are less effective substitutes, with other things remaining equal, will raise the potential rate of inflation over a period of time,” RBI Deputy Governor Subir Gokarn said in a speech on Tuesday.
The yield on India’s most traded 7.99 percent, 2017 bond rose two basis points to 7.98 percent, up 2 basis points after Gokarn’s comments as traders said they added to the likelihood of a 25 basis point rate increase next week.
“This means that actual inflation or interest rates will be higher than they would be in the absence of such increases,” said Gokarn, whose brief at the central bank includes monetary policy.
Annual food price inflation eased to 15.53 percent in early October but remains stubbornly high, in part because of rising demand as incomes increase. The economy of the world’s second most populous country is on track to grow at 8.5 percent this fiscal year.
“When we take into consideration the impact of structural food price shocks such as the ones India is experiencing, the policy implications become complex,” Gokarn said.
Production of pulses was not keeping pace with demand, he said.
The price of some pulses, which are a main source of protein for Indians, has roughly doubled over the past three years.
“Rise in income has increased the share of proteins in peoples’ diet. Rising affluence has also led to an increase in demand for proteins and nutrition,” said Gokarn, adding one option would be to import pulses through contract farming.
The RBI has raised interest rates five times this year amid headline inflation that was in double-digits for six months through July.
The central bank’s perceived comfort zone for wholesale price index (WPI) inflation is 5 to 6 percent, and it has said it expects inflation to ease to 6 percent by the end of the fiscal year in March