Indian food inflation eased in mid February following a drop in prices of vegetables and milk, but high headline inflation would keep the pressure on the Reserve Bank of India (RBI) to raise interest rates this month.
Food inflation in India is among the highest in Asia and Finance Minister Pranab Mukherjee's annual Budget on Monday had spelt out steps to help boost output.
The embattled government, already battling a slew of corruption scandals, has said fighting high food prices was a top priority for the nation of more than one billion people.
The food index rose an annual 10.39% in the week ended February 19 from 11.49% a week ago, while the fuel price index climbed 12.56% from 12.14%.
The data showed onion prices fell by 16.3%, vegetable prices declined 6.03% and milk prices dropped 4.1%, compared with a week earlier.
"The food price data does seem to suggest that we are likely seeing a softening trend now but as oil prices have been on the move, we need to watch the fuel price index, to gauge the overall impact on the headline number," said Anubhuti Sahay, an economist with Standard Chartered Bank in Mumbai.
Headline inflation in January was at 8.23% and the Finance Ministry's chief economic adviser, Kaushik Basu, has said that the February number would be in line with January.
The RBI has raised rates seven times in the past 12 months but headline inflation has remained high partly due to high food prices caused by a sudden shortage of fruits and vegetables.
The Reserve Bank of India is expected to raise rates by 25 basis points at its policy review on March 17.
The Budget for 2011-12 allocated additional funds to raise output of lentil, vegetables, milk and edible oil, and analysts have said India needs to raise output to cool prices.
The yield on most-traded 8.08% 2022 bond yield eased by 2 basis points to 8.07% after the food and fuel data was released.
The benchmark five-year overnight indexed swap rate also edged down 2 basis points to 8.04%.
Subir Gokarn, a deputy governor of the RBI said on Wednesday that steps in the budget to bolster the output of protein sources including lentils and milk would help to manage supply side inflation in food.
He also said high energy prices would put pressure on the RBI's inflation management strategy.
