UPDATE 1-India cbank sees spillover risk from food prices

By Surojit Gupta and Suvashree Dey Chowdhury

Mumbai, Jan 28 (Reuters) - India's central bank on Thursday said there is a possibility of high food prices spilling over to other parts of the economy, a day before it is expected to tighten policy at its quarterly review of monetary policy.

Food prices have surged after a poor monsoon in 2009 hit crop output, and the Reserve Bank of India (RBI) and government officials have said it is a supply-side issue that can not be addressed by monetary policy.

However, the risk of food price inflation spreading to other parts of the economy, such as manufacturing prices, as activity picks up and liquidity remains abundant is a concern.

'Though the inflationary process still remains largely concentrated in food articles, there is a possibility of gradual spilling over of the pressure to other segments in the WPI basket, early signs of which were seen in December 2009,' the RBI said in its December quarter review.

'Thus growth outlook has clear upside prospects and the inflation outlook has upside risks,' the RBI said.

Data on Thursday showed food price inflation accelerated in mid-January for the first time in four weeks. The food price index rose 17.40 percent in the 12 months to Jan. 16, higher than an annual rise of 16.81 percent in the previous week.

The central bank said the possibility of surge in capital inflows along with domestic liquidity conditions may also affect inflationary conditions.

'In view of the dominance of food price inflation, however, balancing the policy needs of supporting durable return to the high growth path while avoiding a situation of generalised increase in inflation through monetary policy actions has emerged as a delicate challenge for the Reserve Bank,' it said.

A Reuters poll last week showed 24 out of 25 economists expect the RBI to raise the cash reserve ratio for banks by up to 50 basis points at Friday's review. Most economists expect the central bank to keep core interest rates on hold.

Industrial output grew at its fastest annual pace in two years in November, strengthening the case for the central bank to tighten policy to temper inflation expectations.

The central bank said its survey of professional forecasters in December found growth forecasts for 2009/10 (April/March) were revised up to 6.9 percent from 6 percent.

'Better expectations about order books, capacity utilisation and production revealed by the survey are indicative of both demand conditions as well as perceptions of further recovery in private demand in the near term,' the RBI said.

The RBI added that downside risks to growth were any adverse impact on crops due to deficient monsoon rains.

'Risks to global growth and higher oil prices also need to be given due consideration,' RBI said.

(Editing by John Mair)

(([e-mail]; [phone]; Reuters Messaging: [e-mail])) Keywords: INDIA ECONONY/CBANK (If you have a query or comment on this story, send an email to [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.