Food inflation slows; rates seen steady

Food inflation slows; rates seen steady

New Delhi: India’s food inflation rate slackened in mid-May, after picking up pace for two weeks, giving the Reserve Bank of India (RBI) more leeway to hold rates until its July review and guage the impact of euro zone debt woes on the domestic economy.

The food price index rose to 16.23% in the year to 15 May, government data showed, lower than the previous week’s annual reading of 16.49% as the fruit and vegetable declined marginally.

A forecast of normal June-September monsoon, vital for farm output and rural incomes, should help calm inflation expectations.

“If there is normal monsoon, and as base effect plays its role, I see food inflation coming down to single-digit by July-August," said N R Bhanumurthy, an economist with the National Institute of Public Finance and Policy.

“However, if the government decides to raise the procurement price of agricultural commodities in a big way, it can lead to second round of food inflation," he said.

The fuel price index rose 12.08%, while the primary articles index was up 15.90%, both slower than the rise a week earlier.

Analysts said if the government decides to raise petrol and diesel prices at a ministerial panel meeting expected on 7 June, it would have a cascading effect on food prices as well.

On Monday, Prime Minister Manmohan Singh said the headline inflation was likely to come down to 5-6% by December, and the economy could grow at 8.5% in the current financial year that began on 1 April.

Wholesale prices, the most closely watched inflation gauge in India, climbed an annual 9.59% in April, slower than 9.9% rise in March.

The yield on the benchmark 10-year bond was steady at 7.60% after the data release.

While food and fuel inflation remain in double digits, manufacturing inflation, which the central bank has said would determine its policy response, slowed in April to 6.70% from 7.13% in March.

The markets expect the central bank to raise rates by 25 basis points in the policy review on 27 July.