eight-month low will ease pressure on the Reserve Bank of India to raise rates immediately to check wholesale price inflation, which crossed into double digits in May. The index for food articles rose 0.34% during the week as cereals and, fruits and vegetables became costlier. A truant monsoon could push up prices of food articles further.
The government was counting on a good monsoon to cool prices and inflation expectations, but the onset of monsoon's progress has been shaky though the met department is staying with its initial forecast of normal rains. Monsoon rains were 16% below normal in June, data from the India Meteorological Department (IMD) showed on Thursday.
"Food prices are likely to ease in the second half of the year with a good monsoon. But now fuel prices have increased, there will be some impact on prices of perishable food items as freight THE stubborn food price inflation finally showed some signs of easing, providing a breather to the government that came under attack for raising fuel prices last week despite high food prices.
The year-on-year inflation for food items dropped sharply to 12.92% for the week ended June 19 from nearly 16.9% for the previous week, largely due to a statistical phenomenon called the base effect, which reflects high food prices prevailed last year. Food prices actually rose during the week prompting experts to say that inflation could rise again.
"This is largely the base effect at play. There will be an increase in food prices again when the fuel price hike gets transferred," said M Govinda Rao, director of National Institute of Public Finance and Policy, a Delhi-based think tank.
The decline in food inflation to an costs will also increase," said DK Joshi, head economist at rating agency Crisil.
The recent increase in fuel prices will push the wholesale price index by 0.9% and will have a larger impact over a period as higher energy and transport costs push up prices of other commodities.
The fuel price index was up 12.90% for the week compared with last week's annual rise of 13.18%. The wholesale price index based inflation was 10.6% for the month of May. The retail inflation, measured by the consumer price index for industrial workers, climbed to 13.91% for May, confirming the fears that food inflation was spreading.
The opposition parties have called for a nationwide strike on July 5 to protest fuel price increase and high food prices.
The RBI has been under immense pressure to raise rates to check rising inflation, but the decline in food inflation will allow the central bank to delay the expected rate increase to its July 27 monetary policy review.
On Tuesday, RBI deputy governor Subir Gokarn said containing food prices was a dominant policy concern of the RBI. "It has created a huge challenge in terms of the impact of monetary action on control of inflation," he said.
However, signs of weakening manufacturing growth could restrain the central bank to a moderate hike. The Purchasing Managers' Index fell to 57.3 from 59 in May, as per a statement from HSBC Holdings and Markit Economics.
"The inflation numbers will continue to remain high in the coming months. I think the RBI will not be too aggressive in its policy review as inflation is a supply side problem and not due to excess liquidity. I would look at a 25 basis hike in repo and reverse repo rates by the RBI," said Siddharth Shankar, director, Kassa Financial Services Group.
The central bank has raised rates by 25 basis points each in March and in April.
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