Rising milk prices may fuel inflation - Citi

Government data on wholesale price inflation pegs the annual jump in milk and dairy at 13.4 per cent in December from 6-7 per cent in the previous year and the 7 per cent increase in milk prices last week could aggravate the situation further, it added.

"Amongst the worst affected dairy products is butter, where prices have doubled... all this is resulting in a knock-on impact across the food chain," Eonomists Rohini Malkani and Anushka Shah wrote in a note on Monday.

Accelerating food inflation, largely because of a poor harvest and rising global commodity prices, has become a major concern for the government, as about 42 per cent of the Indian population lives on less than $1.25 a day.

Latest government data shows that the rate of food inflation rose to 17.56 per cent in the 12 months to Jan 23, higher than an annual rise of 17.40 per cent in the previous week.

India is the world's largest milk producer but drought conditions, tighter feed and water availability have resulted only in a moderate growth in output whereas the demand has continued to rise due to shifting food patterns, Citi said.

Inflation data for January is due on Monday, a significant jump may trigger expectations of central bank policy action.

The Reserve bank of India, which raised banks' cash reserve ratio by a higher-than-expected 75 basis points in its monetary review on Jan 29, lifted its wholesale price index inflation forecast for end-March to 8.5 percent from 6.5 per cent.

It also said it expected inflation to moderate starting in July, assuming a normal monsoon and global oil prices holding at current levels.