Preview – RPT: July inflation up

Inflation probably crept up in July as poor monsoon rains drove food prices higher, a poll showed on Wednesday, giving the central bank less room to cut interest rates to revive a flagging economy.

The poll of 24 economists showed wholesale prices were 7.37 percent higher year-on-year in July, compared to 7.25 percent in June.

Forecasts in the poll were in a tight range from 6.90 percent to 7.59 percent, the narrowest in polls taken since January.

A below-average monsoon, which is vital for over half of India's farmland, is pushing up food prices which along with fuel makes up over a third of the wholesale price index.

Food clearly is the big issue and the biggest swing factor and also the biggest risk to the forecast, said Robert Prior-Wandesforde, Asia economist at Credit Suisse.

Persistently high inflation has kept the central bank from lowering its interest rate even though growth in Asia's third largest economy slowed to its lowest in nine years in the quarter to March.

A headline inflation rate of around 5 percent is seen as the Reserve Bank of India's comfort level but it has stayed above that for over two and half years now.

Last month the central bank kept its key repo rate unchanged at 8 percent last month, citing risks to inflation even though economic conditions are deteriorating.

A weaker rupee, which hit a record low of 57.32 to the dollar in June, puts further pressure on an economy that is a major importer of pulses and edible oils.

A drought will make it more dependant on imports if the monsoon that runs broadly over a four-month period from June fails.

Concerns regarding the magnitude of rainfall in the latter half of the monsoon season are expected to result in food inflation remaining firm in the near term, said Aditi Nayar, economist at ICRA.

... contd.

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