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Food inflation declines to 16.12%, raises hope of further dip

Pranab Mukherjee, earlier in the week, had expressed the hope that food prices would decline by mid-July in view of the likelihood of a good monsoon

Food inflation dropped marginally to 16.12% for the week ended 5th June raising hopes that the price-line may moderate as indicated by finance minister Pranab Mukherjee, reports PTI.

A 0.62 percentage point decline in food inflation over 16.74% in the previous reporting week would also ease pressure on the Reserve Bank of India (RBI) to take immediate policy measures to tame rising prices.

The food inflation declined mainly due to softening of prices of fruits, vegetables and tea.

Mr Mukherjee, earlier in the week, had expressed the hope that food prices would decline by mid-July in view of the likelihood of a good monsoon.

Monsoon accounts for 80% of the annual rains the country receives. Nearly 60% of area under cultivation is rain fed.

The weather office has predicted near normal monsoon this year, although it has been slow to advance since hitting the Indian coast in late May.

"After July, the trend of monsoon (will become)... known. Inflationary pressure would start coming down," he had said.

Experts, too, are of the opinion that decline in food prices would depend mainly on the performance of the monsoon.

Economists believe food inflation is going to remain volatile for few more weeks till there is clarity on the monsoon front and the current liquidity scenario will prevent RBI from raising rates before its July policy review.

Week-on-week, prices of fruits and vegetables fell by 6% and tea became cheaper by 2% during the week under review. Fruits cost 14% less. However, prices of urad rose 6% and that of maize, bajra and gram inched up by 1% each.

When compared to the same period a year ago, prices of potato fell 35% and that of onion by 17.80%.

Pulses, however, became costlier by 34% and milk by 21%.

"Food inflation will remain volatile unless there is clarity on food production which is largely dependent on monsoon. This week it eased, next week it may spike," HDFC chief economist Abheek Barua.

Food inflation has been hovering above 16% since the start of the year. Prices of edibles had started rising last year and peaked to over 20% in December 2009.

Last year, food output was hit by poor monsoon.

"It (food inflation) all hinges on monsoons. If there is a normal monsoon, second half will see a substantial reduction in food inflation. We see overall inflation easing to 6.5% by March," Crisil chief economist D K Joshi said.

High food prices have primarily driven overall inflation up. Food inflation entered double digits (10.16%) in May, according to provisional figures.

Also, final figures for March showed that inflation was 11.04% from 9.9% projected earlier.

"It is unlikely that RBI will revise its rates before its July review as the liquidity situation is very bad ... but certainly (hike rates) in July meet," Mr Barua said, adding that the tightness in liquidity is a temporary phenomenon.

The Reserve Bank will be reviewing its monetary policy on 27th July.

Liquidity has come under pressure due to much higher third generation (3G) and broadband spectrum licence fees, and the first quarter advance tax payments.

Mr Barua said he expects RBI to increase its key policy rates by 25 basis points each in its July review.

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