Retail inflation falls marginally: RBI unlikely to cut rates

NEW DELHI: Retail inflation in India fell marginally in June, but economists said it is unlikely to influence the Reserve Bank of India to cut interest rates as a faltering monsoon has increased the risk of a surge in food prices.

The all-India Consumer Price Inflation--the RBI's preferred gauge of retail inflation--rose to 10% in June from a year ago, data released by Central Statistical Organisation showed. The index was at 10.4% in May.

But economists said the reading, coming just two days after the government announced a drop in June headline inflation, was not enough to convince RBI to ease the monetary policy further at its July 31 meeting.



RBI Governor D Subbarao had described the wholesale inflation numbers for June, although at a five-month low, as "way above the threshold".

"While the economy's sluggish performance over the last year has restrained core inflationary pressures, the central bank's space to ease monetary policy nonetheless remains extremely cramped," said Richard Iley, chief Asia economist at BNP Paribas.

The moderation in retail inflation was mainly due to slower inflation in housing, which rose 10.6% in June from a year earlier, down from 15.7% in May.

But food inflation, which constitute more than 40% of the Consumer Price Inflation index, accelerated to 10.8% in June from 10.7% in May.

Economists said food prices are likely to surge in the coming months because of the recent increase in minimum support prices and the sluggish pace of monsoon.

"The moderation in CPI inflation from last month offers little comfort as it remains in double-digits," said Sonal Varma, India economist with Nomura.

The rise in food inflation was mainly driven by vegetables and pulses, where inflation rose to 27.6% and 9.34%, respectively. Inflation in vegetables was at 26.6% in May, while that in pulses was at 7.89%. Inflation in the miscellaneous category, a proxy for services, remained high at 8.2% in June owing to rising costs of transportation and household requisites.