Eye-watering onion prices send India's inflation to six-month high

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's headline inflation shot to a six-month high in August, driven by a 245 percent annual jump in onion prices, hardening the case for Reserve Bank of India (RBI) governor Raghuram Rajan to keep interest rates high at his first policy meeting later this week.

Food inflation accelerated to a three-year high of 18.18 percent in August, government data released on Monday showed, driving the benchmark Wholesale Price Index up by a stronger-than-expected 6.1 percent.

Economists had expected a slight pick-up to 5.8 percent from 5.79 percent in July.

Monday's data is a grim reminder of the economic pressures facing the new central bank governor as he steps in to deal with India's worst economic crisis in more than 20 years.

Rajan has already warned he does not have a "magic wand," but as he has been dubbed "The Guv" by a gushing Indian media hopes are high that he can find a formula to calm inflationary pressure, stabilise the rupee and at the same time spark a revival in economic growth.

The higher inflation number dampened market expectations that Rajan would begin to rollback some of the measures put in place by his predecessor in a bid to arrest a sharp fall in the rupee since May. Those steps included draining liquidity from the banking system.

The rupee, stocks and bonds all pared earlier gains after the data, with the rupee trading at 62.70 to the dollar as of 1500 IST, up about 1.3 percent on the day but still down more than 12 percent so far this year.

The benchmark BSE Sensex and the broader Nifty both turned slightly lower, while bonds also reversed earlier gains.

However, some economists were comforted by the small increase in prices for manufactured products.

"From a policy-making stand point, we expect RBI to be more objective as manufacturing sector inflation still seems to be contained and they shouldn't react to the higher food inflation number," said R Sivakumar, head of fixed income, at Axis Mutual Fund in Mumbai.

GRAPHIC: India CPI and WPI http://link.reuters.com/zar28t

FOOD PRICES

Onions are a staple ingredient in many Indian dishes and rising prices of the vegetable anger voters and can quickly become a political issue. India is due to hold its largest-ever general election within eight months.

Onions cost 245 percent more in August than a year before, while other vegetables shot up by 77 percent. Eggs, meat and fish were up nearly 19 percent.

"Every day I am making meals using only one small onion, half for the morning meal and another half for dinner," said Santilata Behera, 34, a labourer who supports a family of three and has cut her onion buying to half a kilogram per month.

Farmers are expecting food prices to start moderating from October onwards as supplies rise from crops planted after the much better monsoon season. However, heavy rainfall has resulted in flooding in some areas of the country making it difficult to get produce to market.

More price pressure could come in the form of a government plan to hike retail fuel prices by nearly 10 percent to ease its oil subsidy burden, which has risen after the rupee's fall and on higher crude prices.

Analysts estimate that such an increase in diesel prices would directly add 0.5 percent to headline inflation.

That will only make Rajan's job more difficult because measures to stifle inflation, such as raising interest rates, could at the same time undermine economic growth, already strained and running at a decade low.

FED UP

Before he reveals his monetary stance, Rajan will have to first deal with the outcome of a pivotal meeting on Tuesday and Wednesday of the U.S. Federal Reserve.

The Fed is likely to announce measures to rein in its massive economic stimulus. Fears of an expected policy tapering have already sparked an emerging market sell-off, contributing to the rupee's fall to record lows last month.

The rupee performed better on Monday thanks to a weaker dollar after Lawrence Summers, seen as relatively hawkish on monetary policy, withdrew from the race for the next Fed chief, thus raising prospects that the U.S. central bank will keep policy loose for longer.

The Fed is expected to reduce its $85 billion a month bond-buying programme this week, but financial markets are uncertain about the extent of the reduction.

Concerns that India, along with other emerging markets, will see reduced capital inflows and possibly even outflows once the Fed trims its stimulus programme have been a major factor in the rupee's slump.

Robert Prior-Wandesforde of Credit Suisse reckons Rajan could avoid a hike in interest rates on Friday unless the Fed decisions change his plan. Prior-Wandesforde said Rajan will likely express a commitment to keep liquidity tightening measures in place.

"In our view, anything that suggests he wants to remove these measures would risk undermining the rupee once again," he wrote in a note after Monday's inflation data.

(Additional reporting DELHI bureau and MUMBAI markets and treasury teams; Editing by Kim Coghill)

Matches

MORE TOP STORIES TODAY

Bangalore vs Mumbai: A battle of the big-hitters

Bangalore vs Mumbai: A battle of the big-hitters

Preview — Given the firepower in both line-ups, Dubai crowd may see another high-scorer More »

Delhi look for first points against confident Kolkata

Delhi look for first points against confident Kolkata

Preview — The threat of Sunil Narine looms large again. More »

Glenn Maxwell carves his parallel universe

Glenn Maxwell carves his parallel universe

Glenn Maxwell seems to project an icy disdain when at the crease. Match situations rarely faze him and the bubble in which he plays excludes everyone … More »

BCCI is not anybody’s property — Jagmohan Dalmiya

BCCI is not anybody’s property — Jagmohan Dalmiya

Dalmiya feels that Srinivasan’s ‘power hungry’ attitude isn’t helping matters. More »

It's getting increasingly tough for bowlers: Ajmal

It's getting increasingly tough for bowlers: Ajmal

The 36-year-old believes the T20 format and rule changes in 50-over matches have made a real difference. More »

Moores to get second chance in England top job

Moores to get second chance in England top job

The 51-year-old will succeed Andy Flower, who stepped down after five years in charge following the 5-0 Ashes defeat in Australia in January. More »

Rajasthan edge low-scoring thriller

Rajasthan edge low-scoring thriller

The bowlers restricted Hyderabad to 133 for 6 before Rahane and Binny took Rajasthan over the line. More »

KP ridicules idea of day-night Tests

KP ridicules idea of day-night Tests

Kevin Pietersen has ridiculed the idea of day-night Test cricket, saying the game would be so different to proper Test cricket that we will need a whole… More »

BCCI members want independent probe

BCCI members want independent probe

The board members are realising after the Supreme Court's observations that something has to be done — IS Bindra More »

Maxwell blitz takes Punjab home

Maxwell blitz takes Punjab home

The Kings XI batsman blasted a 43-ball 95 to help his team pull off a massive chase against Chennai Super Kings. More »

'BCCI lacks leaders to take on Srini'

'BCCI lacks leaders to take on Srini'

Two former BCCI presidents, Shashank Manohar and Jagmohan Dalmiya, have reacted strongly to the news of the BCCI calling an emergent meeting on Sunday… More »

Yuvraj tees off to Sharjah's delight

Yuvraj tees off to Sharjah's delight

Yuvraj Singh was hardly convincing to begin with against Delhi, but a big dose of crowd support and a helping of poor bowling meant he had the opportunity… More »

Stressed Trott stands down again

Stressed Trott stands down again

The England and Wales Cricket Board (ECB) on Friday confirmed that batsman Jonathan Trott is to take another break from all cricket with immediate eff… More »

PCB starts another coach hunt

PCB starts another coach hunt

The PCB has decided to not extend the contracts of head coach Moin Khan, fielding coach Shoaib Mohammad and batting consultant Zaheer Abbas, and has invited… More »

Fiery star Stokes bids to curb his temper

Fiery star Stokes bids to curb his temper

England all-rounder Ben Stokes admits he must keep his anger under control if he is to end his international exile. More »

Bangalore's arsenal blazes to victory

Bangalore's arsenal blazes to victory

Yuvraj Singh was back to his best in his first match for Royal Challengers Bangalore. More »

Pakistan cricketers face probe

Pakistan cricketers face probe

Pakistani cricket authorities have launched an investigation after a number of current international stars played in exhibition matches in the United States… More »

BCCI to meet before next court hearing

BCCI to meet before next court hearing

The BCCI will hold an emergent working committee meeting on April 20 to discuss the future course of action with regard to the Supreme Court hearing concerning… More »

Gavaskar wants a clean IPL

Gavaskar wants a clean IPL

"Integrity is non-negotiable..." says the BCCI's interim chief ahead of Season 7 of the tainted league. More »

Time for Chennai to enter familiar cocoon

Time for Chennai to enter familiar cocoon

Chennai have an emphatic 8-3 lead in the head-to-head with Punjab, with one game tied More »

Kallis, Narine star in KKR win

Kallis, Narine star in KKR win

An all-round display saw Knight Riders thump Mumbai Indians by 41 runs in the IPL-7 opener. More »

'Yak' Kallis still on top of his game

'Yak' Kallis still on top of his game

The 38-year-old South African veteran turned it on for Kolkata Knight RIders in the opening match of IPL-7. More »

Rajasthan and Hyderabad face-off

Rajasthan and Hyderabad face-off

A quality that defines Rajasthan and Hyderabad is consistency. Rajasthan was one among two teams to enjoy complete dominance at home last season. Hyderabad… More »

Srinivasan named in fixing report: SC

Srinivasan named in fixing report: SC

The court emphasised that the tainted administrator can no longer work for the BCCI. More »