Rising milk prices may fuel India inflation - Citigroup

Rising prices of milk and dairy products are a potential pressure point for food inflation, Citigroup said in a recent note.

Government data on wholesale price inflation pegs the annual jump in milk and dairy at 13.4% in December from 6-7% in the previous year and the 7% increase in milk prices last week could aggravate the situation further, it added.

"Amongst the worst affected dairy products is butter, where prices have doubled, all this is resulting in a knock-on impact across the food chain," Eonomists Rohini Malkani and Anushka Shah wrote in a note on Monday.

Accelerating food inflation, largely because of a poor harvest and rising global commodity prices, has become a major concern for the government, as about 42% of the Indian population lives on less than $1.25 a day.

Latest government data shows that the rate of food inflation rose to 17.56% in the 12 months to Jan 23, higher than an annual rise of 17.40% in the previous week. 

India is the world's largest milk producer but drought conditions, tighter feed and water availability have resulted only in a moderate growth in output whereas the demand has continued to rise due to shifting food patterns, Citi said. 

Inflation data for January is due on Monday, a significant jump may trigger expectations of central bank policy action. 

The central bank, which raised banks'cash reserve ratio by a higher-than-expected 75 basis points in its monetary review on Jan. 29, lifted its wholesale price index  inflation forecast for end-March to 8.5%from 6.5%.

It also said it expected inflation to moderate starting in July, assuming a normal monsoon and global oil prices holding at current levels.