Food, fuel inflation ease in late February

Food and fuel inflation eased in late-February, but remained at elevated levels, maintaining the case for further monetary tightening to keep a lid on headline inflation.

India's food price index rose an annual 9.52% in the week to February 26, slower than a 10.39% rise in the previous week as prices of vegetables, potatoes and rice declined, data showed on Thursday.

Fuel price index climbed up 9.48% in the same week from 12.56% a week earlier.

Even as food prices are declining, the risk of rising energy prices on unrest in the Middle East poses a challenge to policymakers' inflation management strategy as costlier fuel runs the risk of stoking overall inflation.

"Food inflation is down, but due to (political) developments in the Middle East, fuel inflation may go up. I expect the central bank to raise the policy rates by 25 basis points (next week)," said Basanta Pradhan, an economist at the Institute of Economic Growth, a Delhi-based think tank.

Equity and bond markets were unmoved by the latest figures.

Subir Gokarn, a deputy governor at the Reserve Bank of India (RBI), last week said high oil prices would put pressure on the RBI's strategy to manage inflation.

The RBI has raised interest rates seven times since last March in its bid to control inflation and is expected to deliver another hike of 25 basis points on March 17, when it reviews policy.

Headline inflation in January was at 8.23%, well above the RBI's comfort zone of 4-5% and compared with its end-March target of 7%.

With crude oil prices near a two-and-half year high, central banks across Asia are under pressure to act for fear that these costs will fuel broader inflationary pressures in the economy.

South Korea's central bank on Thursday became the third central bank in Asia after Thailand and Vietnam to raise interest rates this week to curb mounting price pressures.

China had also raised rates last month for the second time in just over six weeks.