07/16/2012, 00.00

Inflation drops but late monsoons threaten India's food sector

In June, inflation stood at 7.25 per cent against 7.55 in May. Unsatisfied, India's central bank cannot anticipate whether interest rates will be cut as the government would like to see to boost the economy. Food sector faces crisis as late monsoons threaten harvest, higher prices.

Mumbai (AsiaNews/Agencies) - India's headline inflation fell to 7.25 per cent in June, the lowest in five months. However, the Reserve (Central) Bank of India (RBI) is not satisfied because food inflation continued to fuel the headline number. For this reason, it is likely to keep interest rates unchanged. A weaker-than-normal monsoon is also raising concerns about a possible harvest shortfall that could contribute to the continuing rise in food prices.

In May, inflation reached 7.55 per cent against 7.5 in April (revised from 7.23). At 7.69 per cent, March recorded the worst level. In January and February, it was 6.55 and 7.36 respectively. However, food inflation rose at a faster rate, 10.81 per cent in June, against 10.74 in May.

Only at the end of July will the RBI know whether to cut interest rates and meet the government's request. In April, the RBI had already cut its key interest rate by 50 basis points, or 0.5 per cent, more than the widely-expected 25 bps.

At present, predicting what the RBI might is impossible. Back in April, the central bank had added a number of caveats for future cuts, saying they would rely entirely on what the inflation rate would be.

Unusual weather conditions are not helping the economy. Late monsoon rains, which usually come in June, could damage grain and cereal crops.

Although India has a significant stockpile of food grains and cereals, it is hobbled by a weak storage and distribution system that often causes grains to rot instead of reaching the intended recipients. This means that storage costs tend to be high.


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