India’s retail inflation eases to a more than 2-year low

India's annual retail inflation cooled to a more than two-year low of 4.25 per cent in May as cost pressures on food eased, moving closer to the Reserve Bank of India's (RBI) target of 4 per cent, government data showed on Monday.

However, inflation is now expected to pick-up again, underlining the central bank's message that tight monetary conditions should remain in place until price pressures cool on a sustainable basis.

Inflation eased to 4.25 per cent in May from 4.7 per cent in April, firmly within the RBI's inflation band of 2 per cent-6 per cent for the third straight month.

Last week, the RBI said it will focus on anchoring inflation close to 4 per cent, the mid-point of the range, as it kept rates on hold for second straight meeting.

The latest reading compared with 4.42 per cent in a Reuters poll of 45 economists and was the lowest since January 2021.

Food inflation, which accounts for nearly half of the overall consumer price basket, moderated to 2.91 per cent in May against 3.84 per cent in April.

"Food inflation benefited from a sequential fall in the prices of fruits and oils," said Suvodeep Rakshit, economist at Kotak Institutional Equities.

However, concerns are growing that deficient monsoon rains to feed crops will add pressure on food prices in coming months with signs that the hot, dry weather caused by the El Nino weather phenomenon is threatening farms across Asia.

India's central bank is expected to maintain its pause on interest rates in the current fiscal year, as inflation is likely to range between 4.4 per cent-5.4 per cent, higher than RBI's target, said Devendra Kumar Pant, economist at India Ratings.

Economists also said a high base effect helped lower the inflation print for May. The price of vegetables fell 8.2 per cent year-on-year, while edible oil fell 16 per cent, offsetting rise in cereals, pulses, eggs and milk.

Core inflation, which had been easing after being a key concerns for months, remained below 6 per cent for a third consecutive month.

According to two economists' estimates, core inflation was 5.02 per cent in May, compared with 5.2 per cent in April.

The Indian government does not release figures of core inflation, which strips out volatile food and energy prices.