Food prices have been another cause of concern for policymakers in India. The food articles inflation (or FAI) saw a staggering pace of 19.69% in October 2013 while the wholesale price inflation (or WPI) had risen by 7.52% in the same month. High food prices translate into the general inflation level and are major influencers of monetary policy in India.
Due to its status in the economic growth cycle, India spends a lot on food compared to durable items. Hence, a fluctuation in food prices affects the common man severely. In order to better understand the measures of inflation in India, you can refer to an earlier post here. In order to understand why inflation is different between emerging and advanced economies, refer to this post.
The Reserve Bank of India (or RBI), India’s central bank, in its last policy announcement in September 2014, said that “the latest readings on sensitive components of food prices suggest that they may have peaked after monsoon related increases.” However, the RBI decided to adopt a wait-and-watch policy and did not reduce its key repo rate, in contrast to market expectations.
Inflation in general and that in food prices in particular has come down to below 5% in the past three months. An indication of loose monetary policy by the RBI in its upcoming policy announcement in December would be favorable for the markets. Though some of it has already been priced in the stocks of interest rate sensitive sectors, a rate cut will likely still push prices, which should benefit India-focused investments like the WisdomTree India Earnings Fund (EPI), the PowerShares India Portfolio (PIN), the iShares S&P India Nifty 50 Index Fund (INDY), the iShares MSCI India ETF (INDA), and the iPath MSCI India Index ETN (INP).
The next article will explain what the Doing Business report for 2015 had to say about India.