Early June sees easing of food, fuel inflation

India's food and fuel price inflation eased in early June, reducing pressure on the Reserve Bank of India to accelerate its process of tightening monetary policy.

The country’s food price index rose 16.12 per cent in the year to June 5, snapping a two-week rise, and lower than the previous week's annual reading of 16.74 per cent, according to recently released government data. The fuel price index climbed 13.18 per cent, compared with an annual rise of 14.23 per cent in the previous week.

There has been pressure on the Reserve Bank of India (RBI) to hike rates before its July policy review after the wholesale price index rose 10.16 per cent in May, the highest in the G20 group of leading economies.

Most analysts do not see the RBI raising rates before the July 27 review, in line with the bank's earlier stated preference for "baby steps" toward normalisation.

The RBI said the federal government would buyback Rs100-billion ($2.15 billion) of bonds via a multiple price auction on June 18. The move is expected to improve liquidity with banks after an estimated outflow of over Rs1.36-trillion between late May and June towards third-generation (3G) and broadband spectrum auction and advance tax payments, which have pushed up overnight cash rates.

High inflation has proved to be severe case of worry for Prime Minister Manmohan Singh's coalition government, which has held back on major reforms such as freeing up retail fuel prices ahead of eight state elections due later in 2010 and 2011.