India's wholesale price inflation eased to a four-month low in June after the new government curbed farm exports, but a growing risk that drought will shrivel summer crops could encourage the Reserve Bank of India (RBI) to keep interest rates on hold.
Wholesale prices rose 5.43 percent year-on-year last month, their slowest pace since February, compared with a 5.80 percent annual rise forecast by economists in a Reuters poll. In May, prices rose 6.01 percent from a year earlier.
Prime Minister Narendra Modi, elected in May amid anger over persistently high inflation, particularly food inflation, has ordered a crackdown on hoarding to hold down food prices and set limits on the export of staples, such as onions and potatoes.
While those measures helped cool food inflation to 8.14 percent in June from 9.50 percent the previous month, vegetable prices still recorded a double-digit gain during the month.
Adding to inflationary worries are prospects of a first drought in five years and turmoil in Iraq, which have increased the risk of a run-up in food and fuel prices.
Weak rainfall in India since the monsoon season started last month has already driven up prices of basic food items, such as milk, potatoes and tomatoes and could further delay a decision by the RBI to cut interest rates and ease the flow of credit to the economy.
"We continue to remain cautious on the (inflation) trajectory given the scanty rainfalls witnessed across different parts of the country," said Upasna Bhardwaj, an economist at ING Vysya Bank in Mumbai.
"At the same time, pick-up in demand is further likely to keep the core prices under pressure leaving no room for RBI to ease monetary policy at least through this year."
RBI Governor Raghuram Rajan held benchmark interest rates at 8 percent at the June policy meeting. He has raised rates three times since taking charge last September. The next policy review is due on August 5.
Last week, Rajan said the central bank was "determined" to make sure consumer inflation, which it tracks to set lending rates, follows a "glide path" lower.
Economists in a Reuters poll forecast that consumer price inflation probably eased to 7.95 percent last month, down from 8.28 percent in May. The government will release the consumer price data at 5:30 p.m.
A flare-up in global crude prices also runs the risk of aggravating India's inflationary woes as the country imports nearly 80 percent of its oil.
Brent crude bounced off of three-month lows on Monday to stand above $106 a barrel on fears of supply disruptions amid new and continuing violence in Libya and Iraq.