Food, fuel inflation ease in late July

Food, fuel inflation ease in late July

New Delhi: India’s food and fuel inflation marginally eased in the week to 24 July, leaving unchanged expectations of further monetary tightening by the central bank in the near term.

Markets widely expect a 25-basis point hike in key rates in the central bank’s mid-quarter policy review on 16 September.

The Reserve Bank of India (RBI) sees inflationary pressures worsening on capacity constraints in the rapidly expanding economy and does not see headline inflation returning to near acceptable levels till the end of the fiscal year in March.

Data released on Thursday showed the fuel price index rose an annual 14.26% in the week to 24 July as against a 14.29% reading in the previous week. The government had hiked fuel prices in end-June.

The food price index rose an annual 9.53% in the period compared with last week’s increase of 9.67% as prices of fruits and vegetables fell by 3%.

The primary articles index rose an annual 14.36%, compared with the prior week’s rise of 14.50%.

The yield on the 10-year benchmark bond eased 1 basis point from the day’s high of 7.89%, its highest since 7 May and a level first touched on Monday.

“I think the concern now is not really food inflation which is easing but core inflation which is shooting up and is reflecting demand-side pressures," said N.R. Bhanumurthy, economist with the National Institute of Public Finance and Policy, a Delhi-based think-tank. “...The situation is worrisome and I expect at least another 25 basis points hike in the offing."

The RBI has said it aims to keep inflation expectations in the 4% to 5% range, and expects headline inflation to be at 6 percent at end-March 2011. This contrasts with Prime Minister Manmohan Singh’s forecast of 6% by December.

A year-long spell of double-digit food inflation has sparked street protests and opposition had shut down parliament last week accusing the Congress party-led government of not doing enough to control prices.

Wholesale price inflation (WPI) the most widely watched measure of prices, stood at 10.55% in June and is expected to stay in double digits in July.

On Wednesday, finance minister Pranab Mukherjee said the economy’s rapid expansion was generating inflationary pressures, and the central bank’s “appropriate monetary policy" was helping efforts to tame prices by mopping up excess liquidity.