Inflation at 9.72 pct in Sept; RBI rate hike likely

Labourers unload garlic from a supply truck at a wholesale vegetable market in Ahmedabad June 23, 2011.

NEW DELHI (Reuters) - India's inflation barely budged in September, staying above 9 percent for the tenth straight month and girding the market for another interest rate rise even as policymakers around the world mull easing rates to stimulate a weak global economy.

The Reserve Bank of India (RBI) has raised rates a dozen times since March 2010, but with no sign of a cooling in prices, another rate rise looks likely at its policy meeting on Oct. 25.

The RBI vows to keep up its inflation fight despite heavy resistance from business leaders and politicians over an industrial slowdown and weaker investment demand.

"If you want inflation to come down, you have to use technology to bring down costs of production," said K.C. Chakrabarty, a deputy governor at the central bank, after the data was published.

"If inflation is as high as 9-10 percent, we need to do something," he added.

A jump in fuel and power prices drove the wholesale price index up 9.72 percent versus a year earlier, government data showed on Friday, almost in line with a Reuters poll of analysts and a touch lower than August's 9.78 percent print.

India's July headline inflation was revised upwards to 9.36 percent from 9.22 earlier. Manufacturing inflation eased to 7.69 percent in September, its lowest in four months, mainly driven by a fall in textile, cement and leather prices.

The rise in fuel and power index in September was mainly driven by a 3-4 percent rise in electricity tariffs.

The build up in price pressures continue unabated. Indian Railways announced a 3 percent rise in freight rates from Saturday and local media reports suggest another increase in power tariffs following a rise in coal prices.

Other central banks in Asia and Latin America have turned dovish as growth weakens under the weight of debt problems in the United States and the euro zone. Indonesia jumped ahead of its neighbours on Tuesday with a quarter percentage point cut.

"Even if regional policymakers shift towards an accommodative bias, India's unique circumstances, amidst structural bottlenecks, will make it difficult for the RBI to toe their line," said Radhika Rao, an economist at Forecast PTE in Singapore.

"Steep depreciation in the rupee in Q3 also complicated the authorities' anti-inflationary stance, with 25 basis points hike baked into the October rate meet," Rao said.

For a graphic on inflation, factory output, click link.reuters.com/pur44s

WEAK RUPEE

Not everybody expects India to raise rates again, however. Pressure is mounting for a pause in monetary tightening that has pushed the repo rate to 8.25 percent, the highest in three years.

India is usually more insulated from global headwinds because its growth is driven by domestic demand rather than exports.

On the inflation side, many warn monetary policy alone will not rein in prices that are being driven up by bottlenecks affecting food distribution as a growing middle-class consumes more meat and dairy products.

"On the supply side, there is little momentum for reforms in agriculture to increase yields and on improving efficiency in the supply chain," Seema Desai, a political risk analyst at Eurasia Group said in a report.

Inflation has been compounded by weakness in the rupee, which has lost nearly 9 percent so far this year and remains the worst performer among major Asian peers. The higher price of imported goods including oil has fed through to consumers.

The manufacturing sector in particular has been hard hit, with annual production growth down to low single digit for two consecutive months in the last quarter.

Meanwhile, government bond yields continue to rise as liquidity stays tight in the rupee money markets.

Analysts suspect the central bank may be forced to inject funds either through open market operations or by cutting bank reserve requirements if the deficit in the short-term cash markets stays above its comfort limits for a long time.

At 2:25 p.m. (0855 GMT), the benchmark 10-year bond yield was at 8.81 percent, its highest since Aug. 28, 2008, after easing 1 basis point to 8.77 percent immediately after the data release.

(Additional reporting by Nigam Prusty and Swati Bhat; editing by Malini Menon)