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November 7, 2011

 

India's food prices to remain elevated despite bumper crops

 
 

Bumper crops in India are unlikely to dent soaring food prices because of higher farm costs and subsidies for farmers.

 

India's food-grain output is expected to hit an all-time high of 245 million tonnes in the 2011-12 crop year, helped by plentiful monsoon rains that mainly boosted summer-sown rice output.

 

The rains delayed delivery of rice and oilseeds by about a month. Those crops started reaching local markets this week, while sugarcane crushing has started in Maharashtra, the largest producing province in the country.

 

But with the government raising the procurement price for rice, oilseeds and other key crops by 8% to 17% to encourage increased planting, consumer prices are unlikely to fall substantially.

 

In the latest reporting period, India's food-price inflation accelerated to 12.21% in the week ended October 22, up from 11.43% in the previous week.

 

"There is a very good harvest this year. One would have expected prices to come down," an economist said. "But I expect limited relief because minimum support prices [paid to growers] have increased and the overall cost of cultivation has gone up."

 

While this will not give policy makers enough room to start cutting rates again, the Reserve Bank of India may not raise rates further, analysts said.

 

The central bank has raised its policy rate 13 times since March 2010 to rein in inflation. The Reserve Bank of India last raised rates October 25.

 

Despite the tight money policy, inflation has continued to hover above 9% for 10 consecutive months through September.

 

High interest rates stem inflation by curbing the amount of money available for spending on goods, but they also inhibit capital expenditures. Indian industry has long complained that the rate hikes are hurting economic growth.

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