Annual food inflation eased to a six-week low of 7.78% in the week to June 18, from 9.13% a week earlier, although the fuel price increase and its knock-on effects are expected to maintain pressure on the central bank to continue with monetary policy tightening.
However, fuel price inflation accelerated to an eight-week high in mid-June and the government's increase in diesel and other fuel prices is expected to put upward pressure on prices in coming weeks and push headline inflation towards double digits.
The fuel price index climbed to 12.98% in the week to June 18, before the fuel price rise took effect, from 12.84% a week earlier, government data showed on Thursday.
India's headline wholesale price index (WPI) inflation stood at an annual 9.06% in May despite continued monetary policy tightening by the central bank, which has increased interest rates 10 times since March 2010.
The government raised prices of diesel, cooking gas and kerosene last Friday, a politically unpopular move that adds to inflationary pressure, but gives relief to oil companies reeling from revenue losses on state-set fuel prices amid high global crude prices.
Diesel, cooking gas and kerosene comprise 6.4% of the total WPI basket and 70% of the fuel component of the WPI.
Standard Chartered expects the increase, which was effective June 25, to add about 70 basis points to headline inflation.
As the increase in diesel and other fuel prices was accompanied by duty cuts on crude oil and petroleum products, the price increase is not expected to help ease India's fiscal deficit, which the government has targeted at 4.6% of GDP in the current fiscal year.
Private economists widely view that target as optimistic, and traders expect the federal government to make more market borrowings than its budget target in the second half of the fiscal year.
The primary articles price index was up 11.84%, compared with an annual rise of 12.62% a week earlier.
The Reserve Bank of India is widely expected to raise rates by another 50 basis points in coming months.
Source: Business Standard
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Intern at DENIP Consultants Pvt. Ltd.
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