New Delhi: India’s food and fuel prices quickened at the end of May, putting upside pressure on the wholesale price index that could prompt the need for monetary tightening by the Reserve Bank of India (RBI).
The food price index rose 16.74% in the year to 29 May, higher than the previous week’s annual reading of 16.55%, following a rise in fruits and potato prices, government data released on Thursday showed.
The fuel price index climbed 14.23%, compared with an annual rise of 14.14% in the previous week.
Food prices are likely to ease on the prospects of a normal June-September monsoon that is the main source of irrigation for farms in India.
But a possible increase in domestic fuel rates runs the risk of stoking inflation across sectors and could impact the government’s target for headline inflation by December.
New Delhi wants to move away from state pricing of petrol and diesel, and allow the market to determine prices, which would help improve government finances.
Prime Minister Manmohan Singh’s government has so far deferred the politically sensitive decision to free up fuel prices amid strong political opposition to subsidy cuts from a key coalition ally.
Wholesale prices, the most closely watched inflation gauge in India, rose 9.59% in April from a year earlier, but Singh expects them to cool to 5-6% by December.
An elevated headline inflation level would also put pressure on the RBI, which is looking to raise rates steadily, to take a more hawkish stance.
“A prolonged monetary tightening is needed and we believe that the Reserve Bank of India, so far, has been too slow in raising policy rates,” Kevin Grice, senior international economist with Capital Economics in London, said in a research note on 7 June.