WRAPUP 1-S&P lifts India outlook; inflation still a concern

* S&P lifts India outlook to stable from negative

* RBI deputy says open to policy action before April 20

* Food prices up 16.3 pct y/y; second weekly decline

* Fuel inflation at 12.68 pct on price hikes

* Bonds, shares rise after S&P statement

By Matthias Williams and Tony Munroe

NEW DELHI/MUMBAI, March 18 (Reuters) - Standard & Poor's lifted its outlook on India to stable from negative on Thursday, citing an improving fiscal position and strong economic growth but warned on inflation, giving a filip to stock and bond prices.

A deputy governor at the Reserve Bank of India said the central bank was open to taking policy action ahead of its April 20 policy review. With headline inflation nearing 10 percent, the RBI is under increasing pressure to raise interest rates for the first time since the global downturn.

Earlier in the day, the government reported food inflation eased for the second straight week in early March but fuel inflation rose.

In affirming its "BBB-" long-term and "A-3" short term credit ratings on India, S&P said the government remains constrained by a high debt burden and deficit, and said inflation is a worry.

"In our opinion, the recent high inflation rate could also derail the stable macroeconomic and interest rate environments," S&P credit analyst Takahira Ogawa said in a statement.

For a text of the S&P statement, click [ID:nSGE62H09L]

On Monday, India reported headline wholesale price index (WPI) INWPI=ECI inflation of 9.89 percent for February.

Analysts said WPI would cross into the double digits by March before retreating over the next few months, but a pick-up in economic growth would keep WPI at high levels for the rest of the year.

India's 10-year bond yield IN063520G=CC fell 4 basis points after S&P raised the ratings outlook for India, while the 5-year swap rate INRAMONMI5Y shed 3 basis points. The 30-share BSE index .BSESN ended up 0.2 percent.

The partially convertible rupee INR= was little changed.

RBI Deputy Governor K.C. Chakrabarty said evidence showed demand factors were beginning to fuel inflation. Another central bank deputy governor had said previously that the central bank was unlikely to make a policy change outside its quarterly cycle except in the case of unforeseen developments.

FOOD INFLATION EASES, FUEL UP

Steepening inflation has seen markets pricing in a 25 to 50 basis point interest rate hike in April. Bond yields IN10YT=RR were steady on Thursday as the latest data did little to change those expectations.

"It (WPI) should peak towards the middle of the year and come off a little bit towards the end of the year, but still be high," said Brian Jackson, an emerging-market economist with the Royal Bank of Canada in Hong Kong.

"You're still getting some pressure from the fiscal side on total demand, and that sort of highlights that current policy rates are not appropriate given where we are."

Data released on Thursday showed the food price index rose 16.30 percent in the year to March 6, lower than an annual rise of 17.81 percent in the previous week.

It was the second straight weekly easing of food price inflation and analysts expected the trend to continue, echoing policymakers' comments that high inflation was due to supply shortages and would cool off as the new, winter-sown harvest reached the market.

The fuel price index rose 12.68 percent in the year to March 6, up from an annual rise of 11.38 percent in the previous week. The federal government had hiked state-set motor fuel prices at the end of February.

Policymakers have said headline inflation would ease over the next two months, after the finance minister said it could top 10 percent in March following a reading of 9.89 percent in February.

But in a sign the government was giving the green light to a rate hike, a top policy adviser said the Reserve Bank of India ought to carefully consider a return to a normal monetary policy. [ID:nSGE62H01X]

The central bank has to balance managing the federal government's record $100 billion borrowing plan for the 2010/11 fiscal year with supporting growth and taming inflation.

Rising prices have sparked opposition-backed street protests and made India's government reluctant to push through reforms such as relaxing fuel price controls, even though the ruling Congress party faces no risk of losing power anytime soon. (Editing by Surojit Gupta and Toby Chopra)