New Delhi: India’s food inflation continued to ease in mid-August, while fuel inflation was flat on the week, but concerns over emerging demand-side pressures on prices will likely see a hawkish central bank hike key rates by 25 basis points when it reviews policy next month.
Analysts say food inflation would further moderate due to good monsoon rains, release of government foodgrains and as the impact of earlier rate hikes trickle through.
Food price inflation in India’s widely watched monthly wholesale price index (WPI) eased to 10.29% in July, from near-20% level last December.
“Food inflation is expected to moderate due to good monsoon rainfall and may stablise around 6 to 7% by March,” said N R Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a Delhi-based think tank, before the release of data.
Data released on Thursday showed the food price index, which has a weightage of over 15% in the WPI, rose an annual 10.05% in the week to 14 August, slower than its 10.35% rise in the previous week, as the prices of fruits and pulses eased.
Fuel price index, which make up little over 14% in the WPI, rose 12.57%, steady from the previous week.
On Tuesday, the Reserve Bank of India (RBI) said in its annual report it may have to give precedence to containing inflation over other policy objectives as it has emerged as a major concern.
The RBI, which has raised its main lending rate by 100 basis points (bps) since mid-March to 5.75%, is expected to raise rates by a further 50 bps before end-2010.
“I will not be surprised if the Reserve Bank decides to hike repo rate and reverse repo rate by 25 basis points each on 16 September,” Bhanumurthy said.
The repo is the rate at which the central bank lends to banks, while the reverse repo is its borrowing rate. The central bank has said the repo rate is currently its policy rate.
The president of the ruling Congress party, Sonia Gandhi, last week told MPs from her party that controlling inflation remained the top priority of the government though the country was proud of its economic growth.
Inflation in Asia’s third largest economy, which is expected to grow at 8.5% in 2010-11, is the highest among the G-20 nations.
The more than 13% rise in consumer price index in June was the highest among all the major economies of the world.