Food inflation turns negative; RBI may cut interest rates

 Food inflation turned negative in late December for the first time in many years as prices of vegetables like onion and potato declined, a development that may prompt the Reserve Bank of India to go for rate cuts at its next monetary policy review later this month.

Food inflation, measured by the wholesale price index (WPI), plunged to (-) 3.36 per cent as on December 24. This is the first time in almost six years, for which data with base year 2004-05 is available, that food inflation has shown a decline on an annual basis.

Encouraged by the development, finance minister Pranab Mukherjee said, "There has been substantial improvement. Food inflation has turned negative for the first time in the recent memory."

Food inflation stood at 0.42 per cent in the previous week. It was 21 per cent in the corresponding week of 2010.

According to official data released today, onion became cheaper by 73.74 per cent year-on-year during the week, while potato prices were down by 34.01 per cent. Prices of wheat fell by 3.41 per cent. Overall, vegetables became 50.22 per cent cheaper during the week ended December 24.
The fall food prices has been substantial since the first week of November, when food inflation stood at double-digit.

"The environment appears to be in favour of the Reserve Bank reversing its monetary policy stance," Prime Minister's Economic Advisory Council chairman C Rangarajan said.
RBI, which has raised interest rates 13 times since March, 2010 to contain inflation, has already paused rate hike in its December mid-quarter policy review. The central bank is scheduled to announce next policy review on January 24.