India's June retail inflation up 6.26% y/y, central bank seen holding rates

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By Aftab Ahmed and Manoj Kumar

NEW DELHI (Reuters) -India's retail inflation rose less than expected in June, strengthening the view that the central bank could keep policy rates at current levels to support an economy hit hard by two strong waves of COVID-19.

At 6.26% year-on-year, the June reading was slightly lower than May's six-month high of 6.30% and below a Reuters poll forecast of 6.58%.

Global fuel prices have increased over 30% from a year ago, and other commodities have also become costlier as the global economy restarts after the pandemic, pushing up input costs for products from farming to cars.

Economists said Monday's June inflation print was above the upper range of the central bank's 2-6% target, but that price pressures appeared to be easing.

"The softer-than-expected inflation comes as a relief in an environment when the continuing accommodative stance remains a necessity to revive growth," said Upasna Bhardwaj, economist at Kotak Mahindra Bank, Mumbai.

"We expect the MPC (Monetary Policy Committee) to draw comfort from relatively stable (inflation)," Bhardwaj said.

The Reserve Bank of India's MPC will next meet to review policy on Aug. 4-6.

High fuel prices and rising input costs for companies are likely to keep inflation elevated for some time, economists say.

Higher fuel prices also threaten to widen the trade deficit for India, the world's third-largest importer of oil, shipping in over 80% of its crude from overseas.

The government has so far resisted reducing taxes on fuel despite pressure from opposition parties as the coronavirus crisis has thrown its tax collection and spending plans into uncertainty.

Food prices, which account for nearly half of the Ministry of Statistics' inflation basket, rose 5.15% year-on-year in June from 5.01% a month before.

Core inflation, excluding food and fuel costs, was estimated at between 6.1% and 6.2%, according to three economists, compared with 6.54% to 6.56% in May.

The Indian government does not release core inflation numbers.

(Additional reporting by Rama Venkat in BengaluruEditing by Gareth Jones and Catherine Evans)

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