By Arsh Tushar Mogre

BENGALURU, (Reuters) – India’s retail inflation fell modestly in May but remained well above the Reserve Bank of India’s upper tolerance limit for a fifth month. This was due to lower fuel prices compensating higher food costs. A Reuters poll confirmed this.

Analysts believe the RBI will continue to raise interest rates, and the dip in the market is temporary.

Last month, the government unveiled a variety of modifications to the tax structure on essential commodities. It also trimmed the fuel tax in an effort to help consumers cope with rising prices.

While the effect on consumer prices isn’t expected until June, economists believe that these measures temporarily halted the price rise.

Inflation will rise if there is a sudden spike in the prices of tomatoes, wheat, potatoes, and other vegetable – essential ingredients for every Indian kitchen. Due to heatwaves and dry spells in northern India, crop yields have fallen.

According to Reuters, 45 economists polled between June 6-9 found that inflation as measured by the Consumer Price Index (CPI), fell to 7.10% in may from 7.79% in April.

The data were due by 1200 GMT June 14th. Forecasts ranged from 6.70% to 8.30%.

Dhiraj Nim, an ANZ economist said that the fuel tax cut by the government lowered prices around 10% compared to earlier in this year.

He said that food inflation continues to rise, particularly in the summer months, starting with May.

For households that have been hit by the pandemic, rising food costs are a concern.

The CPI basket’s largest component, food inflation, rose 8.38% in April year-over-year, making it the most significant increase in almost two years. Imports have also been more expensive due to a four percent drop in rupee value against the dollar.

It means that interest rates will keep on rising.

The RBI raised its repo rate by 50 basis points on Wednesday to 4.90%, following a surprising 40-basis point increase at an unscheduled May meeting. They also stated that inflation would likely stay above its 6% upper tolerance range until December.

“A lot of current pressures, in my opinion, are supply-side driven. The RBI has very little to do in order to reduce this short-term,” Miguel Chanco of Pantheon Macroeconomics, chief emerging Asia economist.