RPT-WRAPUP2-India food inflation eases but rate pressure remains

(Repeats story issued late on Thursday)

* Food price index up 12.92 pct vs 16.90 pct week ago

* Fuel price inflation at 12.90 pct vs 13.18 pct

* June headline inflation seen at 11 pct after fuel hike

* Crucial monsoon rains running well below normal

* More aggressive interest rate hike seen at July meeting (Adds RBI report)

By Rajesh Kumar Singh and Matthias Williams

NEW DELHI, July 1 (Reuters) - India's food and fuel inflation eased in mid-June but a government cut in fuel subsidies will push up prices, adding to pressure on the central bank to raise interest rates more aggressively.

A top government official said the drop in food inflation reported on Thursday was mainly due to comparisons with high prices last year, and that fuel prices could take headline inflation in June to 11 percent.

"There is no reason for celebration," the official, who spoke on condition of anonymity, said when asked about the dip in food price inflation.

India's decision on Friday to raise fuel prices has stoked expectations that the Reserve Bank of India (RBI) will raise rates by 50 basis points (bps) at its next policy review on July 27, twice as much as earlier expected. [ID:nSGE65R007]

An RBI report said on Thursday that inflationary pressures will remain and private credit demand is seen stronger in the current financial year that began on April 1.

The report, which is a research document and does not reflect the central bank's view on policy, also said that while the global financial crisis has shown signs of moderation, worries over the euro zone debt crisis remained.

The developments in Europe and a temporary squeeze on liquidity in the banking system are increasingly being seen as staving off any rate increase before the July 27 meeting.

The fuel price rises are expected to push up monthly price inflation by 0.9 percentage points, government officials have said, exacerbating headline inflation that stood at a surprisingly high 10.16 percent in May.

High food prices have presented a challenge to Prime Minister Manmohan Singh and triggered public protests. Much depends on a strong harvest, but rainfall since the start of the monsoon season has been 16 percent below normal. [ID:nSGE65S0FP]

"There is little sign that monthly inflation measures will fall quickly enough to persuade the RBI that further policy tightening is not required," Royal Bank of Canada said in a note.

The one-year overnight indexed swap rate has risen 18 basis points to 5.50 percent INTRAMONMI1Y= since the release of the stronger-than-expected May inflation data on June 14.

The yield on the 10-year benchmark bond IN078020G=CC edged up one bp to 7.54 percent after the official's downbeat comments on Thursday.

Earlier, data showed the food price index rose 12.92 percent in the year to June 19, lower than the previous week's annual rise of 16.90 percent. The fuel price index climbed 12.90 percent compared with last week's annual rise of 13.18 percent.

Some investors, however, remain convinced that the RBI will raise policy rates only in small increments, pointing to growing uncertainties about the state of the global economic recovery.

Surveys released on Thursday showed manufacturing growth in Asia and Europe cooled in June and slowed a notch in India after hitting its highest in more than two years in May. The HSBC Market Purchasing Manager's Index also showed that input prices for factories were rapidly easing. [ID:nBMA007940] <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Graphic on PMIs of China, India, Japan and S.Korea here ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

POLICY TIGHTENING CAMPAIGN

The central bank raised rates by 25 basis points each in March and in April as economic growth quickened.

"Food prices coming down is purely a function of monsoons: a good monsoon will bring food prices down and the correction will be sharper in the second half of the year," said D.K. Joshi, principal economist at Crisil in Mumbai.

"But now fuel prices will go up and there will be some impact on perishable (food) prices because freight costs have gone up."

The RBI has forecast headline inflation will ease to 5.5 percent by March 2011, but Governor Duvvuri Subbarao said last month it would revisit that forecast at its July review.

India's economy expanded by 7.4 percent in 2009/10 and is expected to grow 8.5 percent in the current fiscal year and 9 percent in 2011/12, according to government forecasts.

Separately, India's May exports rose for the seventh straight month, growing an annual 35 percent to $16.1 billion, official data showed on Thursday. Imports INIMP=ECI rose 38.5 percent to $27.4 billion in the same period. (Additional reporting by Abhijit Neogy and Manoj Kumar) (Writing by Krittivas Mukherjee; Editing by Kim Coghill/Ruth Pitchford)