Lower June inflation fuels rate cut pressure

New Delhi: India's headline inflation slowed to its lowest level in five months in June, helped by slower increases in fuel prices, adding to pressure on the RBI from business leaders to cut interest rates to help revive the lacklustre economy.

The wholesale price index (WPI) rose an annual 7.25 per cent in June, lower than the 7.62 per cent rise estimated by analysts. Wholesale prices provisionally rose 7.55 per cent in May.

Bond yields and overnight index swaps (OIS) rates fell on the news, with some investors predicting the low number will lead the Reserve Bank of India to cut the repo rate at its policy meeting on July 31.

"The unexpected slowdown of inflation is fantastic news, despite the still elevated level: it opens the door for a rate cut already in July," said Dariusz Kowalczyk, an economist with Credit Agricole CIB in Hong Kong.

Inflation above 7 per cent since 2009 has angered voters, marring Prime Minister Manmohan Singh's second term. The prime minister's economic advisor C Rangarajan said the progress of monsoon rains would determine if prices slow further.

"If the monsoon turns out to be normal despite some of the disappointing start, probably we could see the inflation softening a little further ahead," he told CNBC.

Food prices, which rose 10.81 per cent in June from a year earlier, up from 10.74 per cent in May, have been mainly responsible for India's long struggle with inflation.

Annual fuel inflation was 10.27 per cent in June, down from 11.53 a year earlier. A weak Indian rupee has largely offset falling global crude prices and prevented fuel inflation slowing further.

Rising prices have made the government delay unpopular measures such as cutting fuel subsidies that Singh, a veteran economist, says are needed to get the weak economy back on track but that could exacerbate rising prices.

India's benchmark 10-year bond yield was down 5 basis points to 8.05 per cent from levels before the data.

High inflation and interest rates, policy inaction and the euro zone debt crisis have weighed on Asia's third-biggest economy for more than a year. Economic growth faltered to a nine-year low of 5.3 per cent in the first quarter of 2012.

The annual reading for April was revised up to 7.5 per cent from 7.23 per cent, the government said on Monday. Manufacturing prices rose by 5 per cent in the month.