New Delhi: India’s food and fuel price inflation eased in early June, easing pressure on Reserve Bank of India (RBI) to speed up its process of tightening monetary policy.
India’s food price index rose 16.12% in the year to 5 June, snapping a two-week rise, and lower than the previous week’s annual reading of 16.74%, government data released on Thursday showed.
The fuel price index climbed 13.18%, compared with an annual rise of 14.23% in the previous week.
Pressure has been mounting on RBI to raise rates ahead of its July policy review after the wholesale price index rose 10.16% in May, the highest in the G-20 group of leading economies.
K C Chakraborty, a central bank deputy governor, said on Thursday the wholesale price-based inflation is not beyond central bank’s estimates, but added domestic inflation is a bigger concern than other global factors.
Tight market liquidity due to payments for 3G mobile spectrum purchases and advance tax payments, and worries over Europe’s debt crisis are expected to prevent the RBI from tightening more aggressively.
A Reuters survey shows that most analysts do not see the RBI raising rates before the 27 July review, in line with the bank’s earlier stated preference for “baby steps” toward normalization.
The RBI late Wednesday said the federal government would buyback Rs10,000 crore ($2.15 billion) of bonds via a multiple price auction on 18 June.
The move is expected to improve liquidity with banks after an estimated outflow of over Rs1.36 trillion between late May and June towards third-generation (3G) and broadband spectrum auction and advance tax payments, which have pushed up overnight cash rates.
Stubbornly high inflation has emerged as a policy headache for Prime Minister Manmohan Singh’s coalition government, which has held back on major reforms such as freeing up retail fuel prices ahead of eight state elections due later in 2010 and 2011.
Singh has said he expects headline inflation to fall to 5-6% by December.
The RBI has raised rates twice, by a total of 50 basis points, since mid-March to tame inflation and is expected to deliver another hike of 25 basis points. The markets have already priced in such a move.