New Delhi, Jun 14 (TNN) : Retail inflation accelerated to a near two-year high in May on the back of pricey food items, dashing hopes of any reduction in interest rates cut by the RBI in the months ahead. The RBI had decided against cutting rates in its latest monetary policy review earlier this month, citing rising inflationary pressures particularly from food items.

Data released by the Central Statistics Office (CSO) on Monday showed inflation, as measured by the consumer price index (CPI), rose an annual 5.8% in May from previous month's 5.5% increase. This was the second consecutive month when retail inflation has inched after remaining well below the central bank's comfort level. Rural inflation rose 6.5%, up from previous months 6.2%, while urban inflation increased to 4.9% from April's 4.7%.

The food price index jumped 7.6% in May from April's 6.4% year-on-year increase. The increase was led by a surge in price of pulses and products, which shot up 31.6% in May, while sugar and confectionery prices rose 14% year-on-year. Prices of protein-rich items such as eggs, meat and fish also firmed up, exerting pressure on overall numbers. Prices of vegetables jumped 10.8% year-on-year in May.
Both retail and wholesale price inflation have inched up in recent months on the back of sticky food prices, prompting the central bank to pause its rate cutting cycle. Economists said inflation management could pose challenges in months ahead.

"So far, we have been benefiting on the fuel front due to weak global crude prices and on the manufacturing inflation front due to weak domestic demand. Once this comfort begins to recede, which is likely due to the base effect, besides other things, containing inflation around current levels would become even more challenging," said Sunil Kumar Sinha, principal economist, India Ratings and Research.

"RBI by not cutting rate of interest in second bimonthly review not only read the writing on the wall correctly but also correctly warned about the looming threat due to food inflation," he said.

Ratings agency Crisil expects the increase in CPI to be transitory as a normal monsoon and proactive steps by the government in food supply management will rein in food inflation this fiscal and expect the central bank to cut rates if inflationary pressures ease.

"After keeping its policy rate unchanged at 6.5% on June 7, the Reserve Bank of India is in a wait-and-watch mode, wanting further clarity on monsoon, global crude oil prices, macroeconomic and financial developments. RBI signalled caution on inflation by underscoring an upward bias, while retaining its April forecast. We expect RBI to deliver another rate cut of 25 basis points this fiscal if price pressures cool off," Crisil said in a note.