India's consumer price data due to be released later on Monday is likely to show inflation edged up for a second straight month in May, driven by higher prices for food and fuel items, though good rainfall in next three months could dampen food prices.
After leaving rates unchanged at a policy review last Tuesday, Governor Raghuram Rajan said the Reserve Bank of India, which has targeted inflation at 5 percent by March 2017, was still looking for room to reduce interest rates, but there were concerns over upward pressure on food and commodity prices.
Annual consumer prices, which the central bank closely tracks to set its interest rate policy, likely rose by 5.52 percent in May, according to a Reuters poll of economists, compared with a rise of 5.39 percent in April.
Retail inflation has more than halved since November 2013, thanks to a crash in global commodity prices as well as subdued rural demand.
But analysts fear an increase in the cost of petrol and diesel by more than 5 percent since 1 May, and food items like sugar and milk in the last month, could heat up prices.
The government has also hiked tax by 0.5 percentage point on services like telecoms, travel and eating out from June 1.
"The next few readings of CPI inflation are likely to print between 5.5 percent to 6.0 percent," said Aditi Nayar, an economist at ICRA, the Indian arm of Rating Agency Moody's.
"It is too early to gauge whether a rate cut would be forthcoming in the August 2016 policy."
Monday's data comes on the heels of a 0.8 percent contraction in industrial production in April.
Asia's third largest economy grew at 7.9 percent in the quarter to March, outpacing China's 6.7 percent growth, and is projected to expand by around 7.75 per cent in the current fiscal year that started on April 1.
New Delhi is expecting good rainfall between June and September after two years of drought to boost growth and tame prices of food items that account for nearly half of Consumer Price Index.
The monsoon delivers 70 percent of India's annual rainfall, and is critical for the country's 263 million farmers and crops like rice, cane, corn and cotton because nearly half of its farmland lacks irrigation.
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Updated Date: Jun 13, 2016 12:38:27 IST