Food inflation continued to hold out above 16 per cent for the eight straight week ending June 5, prompting the RBI to say it could increase interest rates to arrest price-line ahead of a scheduled policy review next month.
Week-on-week, food inflation showed a marginal decline to 16.12 per cent on cheaper fruits and vegetables, but the overall rate of price rise surged to double digits in May (10.16 per cent).
"Inflation is a big worry to the central bank... The (monetary policy) action can be done before the policy or after," RBI Deputy Governor K C Chakrabarty told reporters in Mumbai, although RBI sent signals to the contrary yesterday when it announced a move to release Rs 20,000 crore into the banking system.
Referring to yesterday's announcement on buyback of three government securities (G-secs) worth Rs 20,000 crore, he said this was done to ease the temporary liquidity crunch in the system owing to around Rs 1.4 lakh crore cash outflow due to payments for 3G and broadband licences and advance tax outgo.
Finance Minister Pranab Mukherjee, earlier in the week, had expressed the hope that food prices would decline by mid-July in view of the likelihood of a good monsoon.
Monsoon accounts for 80 per cent of the annual rains the country receives. Nearly 60 per cent of area under cultivation is rain fed. Last year, crop output was hit by poor monsoon.
The weather office has predicted near normal monsoon this year, although it has been slow to advance since hitting the Indian coast in late May.
"After July, the trend of monsoon (will become)... Known. Inflationary pressure would start coming down," he had said.
Experts, too, are of the opinion that decline in food prices would depend mainly on the performance of the monsoon.
Economists believe food inflation is going to remain volatile for a few more weeks till there is clarity on the monsoon front.
Week-on-week, prices of fruits and vegetables fell by six per cent and tea became cheaper by two per cent during the week under review. Fruits cost 14 per cent less. However, prices of urad rose six per cent and that of maize, bajra and gram inched up by one per cent each.
When compared to the same period a year ago, prices of potato fell 35 per cent and that of onion by 17.80 per cent. Pulses, however, became costlier by 34 per cent and milk by 21 per cent.
"Food inflation will remain volatile unless there is clarity on food production which is largely dependent on monsoon. This week it eased, next week it may spike," said HDFC chief economist Abheek Barua.
Food inflation has been hovering above 16 per cent since the start of the year. Prices of edibles had started rising last year and peaked to over 20 per cent in December 2009. Last year, food output was hit by poor monsoon.