June 12, 2017 / 2:03 PM / in a month

UPDATE 2-Cooling food prices send India's retail inflation to lowest since 2012

5 Min Read

* May CPI inflation 2.18 pct vs 2.99 pct in April

* Sliding food prices fuel discontent among farmers

* Record low inflation boosts rate cut hopes

* RBI remain worried about core inflation, fiscal slippages (Adds more details, industrial output figures, quotes)

By Rajesh Kumar Singh

NEW DELHI, June 12 (Reuters) - India's retail inflation eased to the lowest level in at least five years in May on cooling food prices, bolstering hopes for an interest rate cut by the central bank later this year.

Consumer prices rose by an annual 2.18 percent last month, compared with a 2.99 percent gain in April, data released by the Ministry of Statistics showed on Monday.

The rise was lower than the 2.60 percent forecast by economists in a Reuters poll, and was the lowest since India started publishing an economy-wide consumer price index in 2012.

With headline inflation undershooting the Reserve Bank of India's (RBI) mid-term target of 4 percent for the past seven months, pressure has mounted on the central bank to resume interest rate cuts to juice up economic growth that has hit the lowest level in more than two years.

"This clearly shows that the (inflation) risk is on the downside," said Gaurav Dua, research head at brokerage Sharekhan Ltd in Mumbai. "This opens up a scope for rate cut in August."

The policy repo rate has been on hold since October when the RBI lowered it by 25 basis points to 6.25 percent.

In a sign Asia's third-largest economy is stabilising after the disruption caused by Prime Minister Narendra Modi's clampdown on the use of cash late last year, industrial production grew 3.1 percent in April from a year earlier, separate data showed.

The pace of expansion, however, was slower than a revised 3.8 percent annual rise in March and compared with a 3.0 percent growth forecast by economists in a Reuters poll.

Record Harvest

At its policy review last week, the RBI left key interest rates unchanged, but lowered inflation projections and delivered a slightly less hawkish policy statement.

The central bank now expects retail inflation to range between 2.0-3.5 percent between April and September, lower than its previous forecast of 4.5 percent, and in a range of 3.5-4.5 percent from October-March, down from 5 percent earlier.

While falling commodity prices and a rally in the rupee , which has made imports cheaper, have tamped down price pressures, the biggest comfort policymakers are drawing is the forecast of a normal monsoon this summer.

Retail food prices fell 1.05 percent last month from a year ago, compared with a 0.61 percent gain in April.

Bountiful monsoon rains could result in another bumper harvest for the South Asian nation, which is already sitting on a huge inventory of food grains from last year's record harvest.

That prospect, however, will not cheer millions of India's debt-ridden farmers who are struggling with low prices amid a glut of produce such as lentils, oilseeds and cereals.

Further falls in prices could compound their woes and fuel discontent that has triggered protests in the big agrarian states of Maharashtra and Madhya Pradesh, where police shot dead five protesting farmers last week.

Rate Outlook Still Uncertain?

Even as the outlook for inflation looks benign, another rate cut is not yet a done deal.

The RBI remains worried about sticky core inflation, which excludes volatile, food and energy prices, and the risk of higher borrowing by India's federal states to fund billions of dollar of writeoffs in loans to farmers.

The western state of Maharashtra, home of financial capital Mumbai, on Sunday agreed to forgive all farm loans in a bid to placate protesting farmers.

The rollout of a nationwide goods and service tax from July 1 could also keep the central bank on guard as the new sales tax rates are likely to push up core inflation by 60 basis points, according to an estimate by Nomura. Core inflation in May was around 4.2 percent, lower than 4.4 a month ago.

"We do not expect a deeper rate cut or further rate cuts as inflation is close to bottoming out," said A. Prasanna, an economist at ICICI Securities Primary Dealership in Mumbai. (Editing by Douglas Busvine and Toby Chopra)

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