Food inflation, which is hovering around the double digit numbers, is likely to swell further owing to poor monsoon condition and this in turn could affect the monetary policy decisions in India, says a report.
"The poor domestic weather conditions have increased upside risks to food inflation," Morgan Stanley said in a research note on India. If the food inflation risks were to materialise, the pace of monetary easing could be affected, the report added.
"We believe the food price inflation rise means risk of lower-than-expected rate cuts in India in the second half of 2012," the report said.
Morgan Stanley has forecast that RBI will cut rates by 0.75% in the second half of this year.
Food inflation was at 10.81% in June, against 10.74% in May.
Inflation, as measured by the Wholesale Price Index (WPI), was 7.25% in June much above the comfort level of 5-6%.
With economic growth hitting nine-year low of 6.5% in 2011-12, the industry has been demanding rate cut by RBI to promote growth.
However, RBI in its monetary policy review last month had refrained from reducing rate in view of high inflation and deteriorating global climate.
RBI is scheduled to announce its quarterly monetary policy on July 31.
The rainfall trend in India remains weak, with season to date rainfall 22% below normal (up to July 18).
A weak summer crop outlook means that farmers have taken less land under cultivation, posing risks to the food inflation outlook. Besides, deficient rainfall, could pose risk for the output of rice, coarse cereals, oilseeds and cotton.
Moreover, India is also exposed on the potential rise in edible oil prices globally.
Even as food inflation is trading a downward path in the Asia Pacific, excluding Japan region, it is on a rise in India and Indonesia.
Food inflation in India has rebounded to double-digit levels, while Indonesia's food inflation has been steadily rising over the past four months.
In China, however, food inflation has decelerated to 3.8% YoY in June-12 from a peak of 14.8% in Jul-11, while Korea's food inflation has also decelerated, to 3.2% YoY in June-12 from a peak of 8.3% in August 2011, the report said.
