Fuel inflation eases; RBI rate move eyed

Fuel inflation eases; RBI rate move eyed
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First Published: Thu, Jul 15 2010. 11 38 AM IST
Updated: Thu, Jul 15 2010. 11 38 AM IST
New Delhi: India’s fuel inflation eased on lower industrial fuel prices, but food inflation snapped a two-week easing trend in early July, reinforcing expectations for a 25-basis points hike in the Reserve Bank of India’s July policy review.
Headline inflation in June was 10.55%, data released on Wednesday showed.
The fuel price index rose 14.27% compared with the previous week’s 18.02%, while food price index rose an annual 12.81% in the year to 3 July against its 12.63% reading in the previous week.
Food inflation edged up marginally because of higher rice and wheat prices, data showed.
The RBI is widely expected to raise key policy rates by 25 bps in its policy review later this month, after three rate hikes this year, including a 25-bps raise in key policy rates on 2 July.
Analysts say the sharp revisions in the headline inflation number in March and April have maintained the case for further monetary tightening by the central bank on 27 July and even after that.
The RBI could raise the repo rate, the rate at which it lends to banks by another 50 bps by the end of December, a Reuters poll of 21 economists showed.
India’s April headline inflation number was revised to 11.23% against 9.59% earlier, government data showed on Wednesday.
“I won’t be surprised if the June numbers will be revised to 10.8 or 11%. Given the fuel price increase, I don’t see any reason for headline inflation to be less than 11% in June,” said N R Bhanumurthy, professor at New Delhi-based think-tank National Institute of Public Finance and Policy.
The yield on India’s benchmark bond was unmoved at 7.62% after the data.
Key policymakers have been saying that food prices will moderate by the end of this year, betting on good monsoons and strong harvest to cool the prices from the high levels touched towards the end of last year, when the worst drought in 37 years hit farm output.
But, this may not be enough to bring down headline inflation to the 5% to 6% level by December projected by Prime Minister Manmohan Singh.
A Reuters poll of 21 economists showed that a high expected growth rate of 8.4% for the fiscal year that ends in March 2011 is expected to keep headline inflation elevated at 8.6% in the same period.
With over 40% of India’s 1.2 billion people living on under $1.25 a day, high prices are a liability for the ruling Congress party which could see a voter backlash in about a dozen state elections later this year and next.
The hike in fuel prices saw some of the largest protests in recent years and rallied together the often-squabbling opposition parties against the government.
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First Published: Thu, Jul 15 2010. 11 38 AM IST
More Topics: Fuel | Food | Inflation | RBI | Manmohan Singh |