Wholesale inflation likely edged up to 5% in July

Indian inflation likely picked up slightly in July as its falling currency pushed up the price of imports, making raw materials more costly, and on rising food prices, a Reuters poll showed.

Wholesale prices, India's key inflation measure, rose an annual 5 per cent last month, the poll of 30 economists showed, hitting the ceiling of the Reserve Bank of India's commonly perceived comfort level.

That was up slightly from June's 4.86 per cent reading.

If the trend continues, the central bank's task of containing inflation will likely get more difficult, since raising interest rates will adversely affect an already slowing economy.

A global sell-off has made the Indian rupee the worst-performing emerging Asian currency so far in 2013. It hit an all-time low of 61.80 per dollar last week and is down almost 10 per cent against the dollar so far this year.

India is also one of the largest importers of crude oil and a pick-up in prices through last month coupled with the weak currency added to wholesale prices, which just a few months ago had fallen to below 5 per cent.

"The higher price of crude oil, in rupee terms, is expected to push up the minerals index," said Aditi Nayar, economist at ICRA.

"Some pass through of the rupee depreciation into input prices (cost of raw materials) is expected this month, although the pass through to output prices (end-product prices) may be restrained by the subdued demand conditions."

In response, state run oil marketing firms have hiked the pump price of diesel and petrol to offset under-recoveries.

Food prices, another important factor of inflation in the country, are expected to have remained stable last month although the rising fuel costs and shortages in supply of key items suggests there will be a pick-up in the near future.

Already the price of onions, a staple item in Indian food, has started to soar.

"Excessive dependence on rainfall has caught India on the bad side even with better rains than last year. Prices of many vegetables such as tomatoes, brinjals and onions have doubled as excessive rain damaged crops," said Bharti Bhargava, FX analyst covering India at Forecast Pte.

Last year's draught in several areas has contributed to the steep retail prices of vegetables.

Food inflation accelerated for the second month in a row to 9.74 per cent in June as vegetable, including onion, prices shot up over 20 per cent from the previous month.

Higher food prices pushed up retail inflation to 9.87 percent in June. Government data due later on Monday is expected to show consumer prices in July rose 9.70 percent compared with a year earlier.

Copyright: Thomson Reuters 2013