In a briefing later in the day, the federal government said rising prices of some farm commodities such as sugar and pulses were "major areas of concern". Although a rise in fuel prices runs the risk of offsetting the decline in food prices, the Reserve Bank of India (RBI) is not expected to raise rates.
Markets have mostly factored in a 50-basis point rise in the cash reserve ratio (CRR), the level of cash banks must keep with the central bank. Analysts expect a rise in key rates as early as March, a Reuters poll showed on Thursday. "Rate action is warranted only when two conditions are fulfilled. One, when the generalised WPI goes beyond 10 percent. Second, when credit growth picks up substantially," said Rajiv Kumar, an economist New Delhi-based think tank ICRIER. "As of now, the RBI should signal change in monetary stance by going for a hike in CRR."
The food price index rose 16.81 percent in the 12 months to January 9, lower than an annual rise of 17.28 percent the previous week. The fuel index rose to an annual 6.43 percent in early January. The index has risen over 9 percent since the end of March 2009, following an upswing in world crude prices amid signs of a global recovery.
"Whether the rise in fuel prices will offset easing food prices is an open question, but there is a risk," said Abheek Barua, chief economist at HDFC Bank in New Delhi. Food prices have risen on supply shortages after the worst monsoon in nearly four decades, followed by floods in some regions that hit crops. Higher government prices paid to farmers were also a contributory factor.
Last week, India's federal government ordered the sale of stocked grain and extended duty-free sugar imports by another nine months. Duty-free imports of white sugar were earlier allowed up to March 31, while raw sugar shipments, without any import duty, are already allowed up to December 31.
Prospects of large Indian imports and tight supplies helped white sugar futures in London touch a 29-year peak on Wednesday. But Indian spot sugar prices fell for the fifth consecutive session on Wednesday as big consumers trimmed buying, hoping prices would fall further. Trade officials say that relatively lower Indian prices discouraged imports but the country may resort to costly imports at a later date.