Food inflation at 11.47% oY as on Aug 28: Govt

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India's food inflation accelerated in late August, maintaining pressure on the Reserve Bank of India (RBI) to tighten monetary policy further at its review next week.

The weekly data could bolster expectations for an increase of 50 basis points in key policy rates by the end of 2010, despite a subdued global economic recovery and signs that India's booming growth may have peaked.

Food inflation accelerated on higher prices of fruits and vegetables.

Data released on Thursday showed the food price index, which has a weightage of over 15% in the wider wholesale price index, rose an annual 11.47% in the week to August 28, compared with 10.86% in the previous week.

The fuel price index rose an annual 12.71% in late August, the same rate as the previous week.

The yield on the benchmark 7.80% 2020 government bond remained unchanged as the data did little to change expectations on the RBI's monetary policy stance.

"Today's data is on expected lines as certain food items witnessed a rise in prices due to floods in some parts of the country," said N.R.Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a Delhi-based think-tank..

"Food inflation is expected to come down to 6% by March mainly on account of good monsoon across the country and due to the base effect."

The Reserve Bank of India (RBI) will likely refrain from toning down its hawkish monetary policy stance as it waits for more data to see whether signs of cooling growth are an aberration or a trend.

Industrial output data for July is due on Friday, while wholesale price index (WPI) inflation data for August will be released on Tuesday. The RBI's first mid-quarter policy review is scheduled for September 16.

The RBI has already raised the repo rate, its key lending rate, by 100 basis points to 5.75% and reverse repo, or borrowing, rate by 125 basis points to 4.50% since March this year.

Market reaction

The data comes at a time when recent economic data has been subdued. While headline inflation for July was at 9.97%, the Index of Industrial Production rose at its slowest pace in 13 months at just over 7%.

India's manufacturing sector also expanded at a slightly slower pace in August from the previous month as the pace of new order growth cooled.

The HSBC Markit Purchasing Managers' Index, based on surveys of 500 companies in Asia's third-largest economy, fell to 57.25 in August from 57.6 in July.

The RBI sources told Reuters that though tightening would continue, the pace would depend on the July IIP and August headline inflation numbers.

RBI Governor Duvvuri Subbarao has said inflationary pressures were easing. But the RBI reiterated last month that its policy priority remains containing inflation.

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