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Will the RBI budge now?
Fri, 18 Dec Pre-Open

In what might burn a deeper hole in your pocket, India's food price inflation is now nearing 20%! This is as per data compiled by the commerce ministry. It shows that food prices on an average increased by 19.95% during the week ended December 5. This is higher than the 19.05% food price inflation that was recorded in the previous week.

Graphic Source: Reuters

So, is there a way the government can control these rising prices that are hurting the aam aadmi?

Sure, the Reserve Bank of India (RBI) is now expected to raise interest rates to curb the rising prices. But will that have any impact? We ask this as the current rise in food prices is not really because of rising demand for the same. It is instead owing to supply shortages due to a weak monsoon this year.

In fact, we had the weakest monsoons in 37 years and then flooding in some parts of the country. This disrupted agricultural production thereby leading to the current shortage of food grains. Thereby, we see any rate hike from the RBI having a minimal impact on food prices.

Of course, if the economy were to continue to gain pace and demand for food items also rise, it would act as a double whammy for prices and the RBI is then expected to chip in with higher interest rates. But not much can be expected from the central bank till then.

So what's the solution now?

"Imports," says the Finance Minister. As a matter of fact, food prices are politically sensitive in India and the government is under pressure from opposition parties and allies to contain inflation. This is especially because food prices are hurting the poorer sections in the country

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Feb 19, 2018 03:37 PM