Mumbai: India's inflation probably eased marginally in June after the new government curbed farm exports, but a growing risk that drought will shrivel summer crops could encourage the central bank to keep interest rates on hold.
Prime Minister Narendra Modi, elected in May amid anger over rising prices, has ordered a crackdown on hoarding to hold down food prices and set limits on the export of staples, such as onions and potatoes.
Presenting his first budget on Thursday, Finance Minister Arun Jaitley vowed to keep the fiscal deficit at 4.1 per cent of gross domestic product in this fiscal year, while allocating more funds to ease inflationary pressures.
"The monsoon this year appears more unpredictable," he told lawmakers, adding that the government would take all steps necessary. Consumer price inflation probably eased to 7.95 per cent last month, down from 8.28 per cent in May, while wholesale price inflation eased to 5.80 per cent, the Reuters poll of economists found.
Modi faces his first challenge as soaring prices for basic food items, such as milk and potatoes, lifted retail food inflation to 9.4 per cent in May, driving wholesale inflation to a five-month high of 6.01 per cent. The government is banking on stocks of food such as rice, wheat and sugar from recent bumper harvests, but has few ways to cap prices of fruits and vegetables that drive food inflation.
"The measures may prove to be inadequate in light of the supply-demand dynamics associated with perishable products, absence of adequate cold storages and inefficiencies in the domestic supply chain," said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody's.
Retail inflation has eased to about 8 percent, after staying in near double-digit figures for the past two years, the highest among the BRICS group of emerging economies - Brazil, Russia, India, China and South Africa. Economic growth has been stuck below 5 per cent for two years - the longest slowdown in more than a quarter of a century. The economy is expected to grow slightly above 5 per cent in this fiscal year to March 2015.
In 2009 benchmark New York futures swept to a 30-year high after the worst drought in nearly four decades forced India, the world's top sugar consumer, to buy large quantities of the sweetener from top producer Brazil.
The farm sector accounts for around 14 per cent of India's nearly $2 trillion economy, and two-thirds of its population of 1.2 billion live in rural areas. Weak investments and industrial performance have hurt economic growth, but figures on Friday showing that industrial output grew 4.7 per cent in May on the year bettered expectations for a rise of 3.8 per cent.
Output gained just 0.1 percent in the fiscal year that ended in March.
Relief far away?
Weak rainfall since a delayed start to the monsoon season could push up food prices - further delaying a decision by the Reserve Bank of India to cut interest rates and ease the flow of credit to the economy. "We believe a rate easing cycle is unlikely to commence before the second half of the current fiscal, keeping interest costs elevated for the productive sectors," said Nayar of ICRA.
Reserve Bank of India Governor Raghuram Rajan held benchmark interest rates at 8 percent in the June policy meeting. He has raised rates three times since taking charge last September. The next policy review is due on Aug. 2.
On Thursday, Rajan said the central bank was 'determined' to make sure consumer inflation follows a ‘glide path’. An RBI panel has recommended bringing down consumer price index (CPI) inflation to around 8 per cent by the end of January 2015 and to 6 per cent by the end of the following year.
