Food, fuel inflation quicken in late-May

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India's food and fuel price inflation quickened in late-May, putting upside pressure on the wholesale price index that could prompt further monetary tightening by the Reserve Bank of India (RBI).

The food price index rose to 16.55% in the year to May 22, government data showed on Thursday, higher than the previous week's annual reading of 16.23%, following a rise in vegetable prices.

The fuel price index climbed 14.14%, compared with an annual rise of 12.08% in the previous week due to higher prices of electricity.

Although food prices have moderated after hitting a peak of 20% last December, they continue to be near 17%. However, the prospects of a normal monsoon this summer are expected to cool prices.

The four-month annual rains, vital for irrigation and farm output, hit the country's southern coast on Monday as expected. Last year, the driest season in 37 years had damaged crops and drove food prices up.

Wholesale prices , the Reserve Bank of India's (RBI) most closely watched gauge of inflation, stood at 9.59% in April after hitting 10.6% in February, the highest since October 2008.

Any moderation in food prices is expected to bring down the headline inflation and provide relief to the Congress-led government that is facing flak over its handling of inflation.

Prime Minister Manmohan Singh, who expects inflation to ease to 5-6% by December, said on Tuesday the price situation currently was a major problem and would require firm action.

RBI Governor Duvvuri Subbarao said on Tuesday inflation remained higher than its comfort level.

The bank has raised rates twice, by a total of 50 basis points, since mid-March to tame inflation and is expected to deliver another rate hike of 25 basis points when it reviews its policy on July 27.

The RBI has also not ruled out any off-cycle policy action, but worries over Europe's debt crisis had dampened expectation that any action could come ahead of the next scheduled policy review.

"The RBI will continue to normalise rates. But there is little reason why the RBI should be aggressive or hesitant in raising rates." said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai.

"Adjustments in rates will be incremental as there is lot of uncertainty."

A Reuters poll last month showed expectations for a cumulative 100 basis points of tightening in key interest rates by the end of March 2011.

Costly fuel

However, rise in domestic fuel prices runs the risk of offsetting any relief on food prices.

A ministerial panel is meeting on June 7 to consider increasing state-set petrol and diesel prices as India looks to move towards a market determined price regime.