REUTERS: Food inflation accelerates; RBI tightening seen

NEW DELHI (Reuters) - Food prices rose at their fastest pace this year in late November, adding to the pressure on the Reserve Bank of India (RBI) to tighten monetary policy sooner to contain any likely spill-over to the broader economy.

The food price index rose 19.05 percent in the 12 months to Nov. 28, as the worst dry spell in nearly four decades and floods in parts of the country hurt summer crops.
The yield on the benchmark 10-year bond briefly rose one basis point to the day's high of 7.54 percent after the release of the data. It had ended at 7.48 percent on Wednesday.
Food prices are politically sensitive in India and even though monetary policy can do little to influence them, Reserve Bank of India governor Duvvuri Subbarao, voiced concern on Wednesday rising food costs could fuel inflationary expectations.
"If food prices remain elevated, that will impact inflationary expectation and the RBI's job is to manage inflationary expectations," said Sujan Hajra, an economist with Anand Rathi Securities.
"So from that perspective, the RBI (Reserve Bank of India) may be compelled to take action," Hajra said, adding the central bank may start by raising the cash reserve ratio in late December or early January.
The ratio is the proportion of deposits banks need to keep with the central bank.
A week ago, the Organisation for Economic Cooperation and Development had cautioned India against complacency on rising prices.
Food prices usually ease in November and December, but analysts are worried the seasonal dip may not come this year and a government adviser has said high food prices in the period through December would warrant monetary action.
India's widely watched annual wholesale price inflation stood at 1.34 percent in October, but the low headline number reflects the effect of high fuel and commodity prices a year ago and masks a build-up of price pressures in Asia's third-largest economy.
Wholesale prices have already risen over 6 percent from the beginning of 2009/10 financial year that started in April.
Economists have said the index could climb to as much as 8 percent by the end of the fiscal year, above the central bank's perceived comfort zone of around 5 percent.
The Reserve Bank of India (RBI), which cut its key lending rate by 425 basis points during the worst of the global crisis, began scaling back its monetary stimulus at its last policy review in October, by removing some of the liquidity support measures.
It left its key rates steady in October, but fastest economic expansion in 18 months in the quarter through September, fuelled expectations that it will bring forward a rate rise to contain inflation.
The RBI holds its next policy meeting in late January, but it can adjust monetary policy at any time.