Mumbai: 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.
Consumer prices rose 7.31 per cent from a year earlier - the lowest since figures were first published in January 2012 - helped by a slowdown in food inflation and a favourable statistical base, government data showed on Monday. In May, retail prices rose 8.28 per cent from a year earlier.
Earlier, figures showed that wholesale prices rose 5.43 per cent in June, year on year, the slowest pace in four months.
Cooling inflation should cheer Prime Minister Narendra Modi, who has made controlling inflation the topmost priority of his administration. But prospects of a first drought in five years this summer could revive price pressures.
A pick-up in inflation would further delay a decision by the Reserve Bank of India (RBI) to cut interest rates and ease the flow of credit to an economy, which is battling the longest spell of sub-par growth in more than a quarter of a century.
"We continue to remain cautious on the (inflation) trajectory given the scanty rainfalls witnessed across different parts of the country," said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai. "At the same time, a pick-up in demand is further likely to keep core prices under pressure, leaving no room for the RBI to ease monetary policy at least through this year."
RBI Governor Raghuram Rajan held benchmark interest rates at 8 percent at the June policy meeting. He has raised rates three times since taking charge last September. The next policy review is due on Aug. 5.
Last week, Rajan said the central bank was "determined" to make sure consumer inflation, which it tracks to set lending rates, follows a "glide path" lower.
Modi came to power in May amid anger over persistently high inflation. Since taking office, he has cracked down on hoarding to curb food prices and set limits on the export of staples like onions and potatoes. While those measures helped ease food inflation last month, vegetable prices are rising at double-digit rates. Many fear a further acceleration in prices, because patchy rainfall this summer has hit crop sowing. Overall, rains were 43 per cent below the seasonal average last week, resulting in a 51 per cent annual decline in the planting of summer crops.
New Delhi is banking on stockpiles of food such as rice, wheat and sugar from last year's bumper harvests. But it has few ways to cap the prices of fruits and vegetables that drive food inflation.
An uncertain outlook for global crude oil prices is also keeping India's policymakers off-balance. A spike in crude prices could also aggravate India's inflation, since the country imports nearly 80 percent of its oil.
Brent crude bounced off of three-month lows on Monday to stand above $106 a barrel on fears violence in Libya and Iraq will disrupt supplies.
