MUNI THE BOSS

India's food inflation accelerated for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a rate increase in January .
Unseasonal rains have pushed up prices of vegetables such as onions and tomatoes in recent weeks. Onion prices rose over 23 percent over the week to December 25.

The food price index rose 18.32 percent in the year to Dec. 25 and the fuel price index climbed 11.63 percent. This compared with 14.44 percent and 11.63 percent annual rises the previous week.
Indian swap rates and bond yields rose after data showed a sharp rise in the food price data, cementing expectations for further rate hikes by the central bank in the upcoming Jan. 25 policy review.

The most-traded 8.08 percent 2022 bond yield rose as much as 3 basis point to 8.15 percent after the data while the less liquid benchmark 10-year bond yield rose 2 basis points to 8.10 percent. The benchmark 5-year swap rose 9 basis points to 7.84 percent and the 1-year swap rose 8 basis points to 7.10 percent.

India's central bank, which raised interest rates six times in 2010, is expected to increase rates by at least 25 basis points on Jan. 25 when it reviews policy, a Reuters poll showed on Wednesday.

Analysts forecast rates to rise by 75 basis points in 2011. [ID:nBM]

"While some part of the spike in food inflation is onion-prices driven, it confirms a persistent rise in inflationary pressures on other components," said Deepali Bhargava, economist with ING Vysya Bank in Mumbai. "Inflation for December is expected to rise to over 8 percent following which we expect the RBI to hike (interest rates) by 25 basis points in January."


"This number reinforces the base case scenario of a 50 basis point rate hike in January. One has to be prepared now for a much larger frontloaded rate hike series than what one was expecting say a month ago and therefore the entire swap curve should shift upwards," said Hitendra Dave, Head of Global Markets, HSBC India, Mumbai.
FOOD PRICES AT RECORD HIGHS:FAO Global food prices hit a record high last month, outstripping levels that prompted riots and protests in 2008, and key grains could climb even further as weather patterns give cause for concern, the UN's food agency Food And Agriculture Organisation said. Its measure of global monthly price changes for a food basket of cereals, oilseeds, dairy, meat and sugar reached its highest since records began in 1990, topping levels in 2008 when a food crisis sparked riots in some countries. C. Rangarajan, chairman of the prime minister's economic advisory council, said on Wednesday more action on interest rates may be needed from the central bank if inflation remains sticky. [ID:nBMA009266]

Food articles have a weight of 14.34 percent in the wholesale price index , India's most widely watched gauge of inflation, and the spurt in vegetable prices is expected to show up in the headline number when December data is released on Jan. 14.
India's food inflation accelerated for the fifth straight week to the highest in more than a year, reinforcing fears it has spilt over to broader prices and cementing expectations of a rate increase in January .

Unseasonal rains have pushed up prices of vegetables such as onions and tomatoes in recent weeks. Onion prices rose over 23 percent over the week to December 25.