New Delhi: Reflecting the trend in retail inflation, wholesale food price inflation galloped to 7.88% in May from 4.23% in April, paced by rising vegetable prices.

Data released by the industry department showed that Wholesale Price Index (WPI)-based inflation accelerated for the second consecutive month, touching 0.79% in May.

Retail inflation data released on Monday by the Central Statistics Office showed food inflation picking up sharply in the month to 7.55% from 6.4% a month ago, with vegetable price inflation touching double digits at 10.77% against 4.82% in April.

Wholesale food inflation was also driven by vegetable prices increasing 12.94% in May, while the prices of pulses and potatoes rose 35.56% and 60.01%, respectively.

Last week, the Reserve Bank of India (RBI) warned against rising inflation in its monetary policy review while leaving policy rates unchanged. The central bank and the government have set a target of reining in retail inflation to 5% by March 2017.

The Krishi Kalyan cess of 0.5% to build rural infrastructure in India, which kicked in from 1 June, on all taxable services is expected to add to inflationary pressure, along with the recent hikes in petrol and diesel prices.

However, the southwest monsoon which hit the Kerala coast on 8 June, a week later than expected, is expected to lower food inflation. The monsoon is critical to the kharif crop as over half of India’s farmland lacks assured irrigation and the country receives 80% of its annual rainfall during the four months starting June.

The WPI inflation trajectory will in any case start to move up as the base effect wanes, Suvodeep Rakshit, economist at Kotak Institutional Equities, said.

“We estimate it around 4.5-5%, factoring in some softening in food prices with a favourable monsoon on the cards. We believe that this recent uptick in food inflation will subside as rainfall becomes more evenly distributed and acreage picks up," he said.

Rakshit said RBI will continue to focus on Consumer Price Index (CPI) inflation and the call on future interest rate cuts will be more data-centric.

“While another 25 basis points rate cut, sometime in the second half of the financial year, cannot be ruled out yet, the next couple of inflation prints factoring in the initial monsoon impact, and volatility from global factors will shape the RBI’s reaction in the near to medium term," he added.

One basis point is one-hundredth of a percentage point.

While sub-par rains dented foodgrain production over the past two years, based on the forecast of a bountiful monsoon, the agriculture ministry has set a target of producing a record 270 million tonnes (mt) in 2016-17, 7% more than the 252.2 mt estimated to have been produced in 2015-16.

The centre earlier this month announced a moderate 4.3% hike in the minimum support price (MSP) for paddy, the main rain-fed kharif crop, to 1,470 per quintal, in order to keep food inflation within reasonable limits.

One quintal is equal to 100kg. MSP is the price at which the central government buys foodgrain from farmers that is then sold at subsidized rates through the public distribution system.

Sowing of rain-fed kharif crops has begun with the onset of southwest monsoon, the Union agriculture ministry said on Friday. According to preliminary reports received by the ministry from different states, farmers have so far planted 7.1 million hectares with crops such as rice, pulses, coarse cereals, oilseeds, sugarcane and cotton.

The seasonal area under kharif crops is 106.2 million hectares. Although the area planted so far is lower than the 7.7 million hectares sown by this time last year, sowing is expected to pick up as the monsoon progresses.

RBI has cautioned of upside risks to inflation, including firming international commodity prices, particularly of crude oil, and the implementation of the 7th Central Pay Commission awards.

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