Food and fuel inflation accelerates

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India's food and fuel inflation accelerated in the third week of August, maintaining pressure on the Reserve Bank of India (RBI) to tighten monetary policy.

Despite a muted global economic recovery and signs that India's booming growth may have peaked, the RBI is expected to raise rates by another 50 basis points in 2010.

Data released on Friday showed that the food price index, which has a weightage of over 15 percent in the wider wholesale price index, rose an annual 10.86 percent in the week to August 21, more than its 10.05 percent rise in the previous week.

The price rises come despite good monsoon rains this year, which are crucial for irrigation, as well as government predictions price rises would ease. Higher prices of fruits and vegetables led to food inflation accelerating in the latest data.

"Food inflation is up mainly due to seasonal movement and disruption in the movement of farm goods during monsoon season," said Rajeev Kumar, an economist and former director of ICRIER, a Delhi-based think tank.

"I still expect the RBI to raise key interest rates by another 25 basis points on September 16," he added, referring to the next central bank policy review.

The 10-year benchmark bond yield rose one basis point to 7.97 percent after the release of the food inflation data.

The fuel price index rose an annual 12.71 percent in the period, as against an annual 12.57 percent in the previous week. The government raised prices of fuels in late June.

The primary articles index rose an annual 15.19 percent compared with the previous week of an annual 14.75 percent.

Stubborn inflation

Wholesale price inflation, the most widely watched measure of prices, was just below the 10 percent mark in July, after holding in double digits for five straight months until June.

April-June growth was slightly above expectations at 8.8 percent, but both the manufacturing PMI in August and industrial output in June both eased, indications that economic expansion may be peaking off.

The PMI is a leading indicator and a slowing manufacturing PMI indicates that manufacturing expansion may have peaked on capacity constraints and is slowing down.

Last month, D. Subbarao, governor of the Reserve Bank of India (RBI) said that there is evidence that inflationary pressures in the economy are easing.

High prices are a major political issue. India has witnessed street protests and the opposition had shut down parliament to protest what it called government's lack of ability to control prices.