New Delhi: India’s inflation eased in June after the new government curbed farm exports, but a growing risk that drought will damage summer crops could encourage the central bank to keep interest rates on hold at a policy review meeting early next month.
Data released by the government showed that retail inflation in June hit 7.31%, the lowest level seen since the new measures was introduced in January 2012, while the wholesale price-based index (WPI) was at four-month low of 5.43%, mainly due to because of easing prices of vegetables.
RBI had in the past put its comfort zone for WPI-based inflation at 4.5-5%, but has now given it up for Consumer Price Index (CPI), which it believes is a better measure. The central bank had said that it is targeting 8% retail inflation by next January.
The government is on high alert for several food products ranging from potatoes and onions to rice and milk to ensure that prices remain under check as weak rains may affect production and result in a spike. Having fought the last election on the price plank the government is keen to avoid high inflation.
We do not expect food inflation to soar considerably due to a) proactive measures already taken by the government b) a strong base effect from last year. In the longer run, announcements in the Budget to boost agriculture and improve the supply chain will help bring down CPI inflation, but lowering and sustaining it around 6% the Reserve Bank of India’s target for January 2016 will pose a challenge, ratings agency Crisil said in a note. Apart from weak rains, there is also the fear of a rise in oil prices given the problems in Iraq.
Bureau Report
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