Inflation may ease with monsoon - RBI

SINGAPORE Tue Jun 8, 2010 11:06am IST

A man collects sand from a beach, against the backdrop of monsoon clouds on the outskirts of Kochi June 1, 2010. REUTERS/Sivaram V.

A man collects sand from a beach, against the backdrop of monsoon clouds on the outskirts of Kochi June 1, 2010.

Credit: Reuters/Sivaram V.

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SINGAPORE (Reuters) - Price pressures in India will start to ease if the country gets a normal monsoon season but the Reserve Bank will further tighten monetary policy, Deputy Governor Subir Gokarn said on Tuesday.

He also said the government may put off reducing fuel subsidies for the foreseeable future to avoid hurting consumers who are already suffering from high food prices.

"From a political and welfare perspective, it is difficult to impose on them a hike in fuel prices at the time when they are already dealing with high food prices. Balancing out these two factors will drive the timing," Gokarn told reporters on the sidelines of a Nomura investment conference in Singapore.

The government decided on Monday to defer till next week a decision on raising fuel prices, the second time in a year it has tripped on pushing politically sensitive reforms that could help trim a budget deficit.

India's food price index rose 16.55 percent in the year to May 22, faster than the previous week's annual rise of 16.23 percent, whole price data released last Thursday showed.

The fuel price index climbed 14.14 percent after gaining 12.08 percent in the previous week.

Gokarn, however, played down concerns about food prices, noting that they could begin to fall in coming weeks depending on the weather.

"If the monsoons are normal, inflation is probably at its peak right now."

He added the rising food prices reflected to some extent changing consumption patterns rather than a shortage of wheat and other crops.

"People are getting richer. They are starting to consume more of food other than cereal, for example, meat, eggs, sugar, milk. We seem to have some supply bottlenecks on many of these things, which is starting to drive food prices up."

Gokarn, a former chief economist for Asia Pacific at Standard & Poor's, reiterated comments made on Monday that the central bank will continue to tighten monetary policy at a steady pace.

"Our monetary policy stance is to make a steady correction because they (interest rates and liquidity) are currently not in alignment with the rate at which the economy is growing."

The RBI has raised benchmark rates twice by a total of 50 basis points since March, after headline inflation hit a 17-month high of 9.9 percent. It had earlier lifted reserve requirements of banks, saying it preferred to use tools that had predictable effects on liquidity.

(Editing by Raju Gopalakrishnan & Jan Dahinten)

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