NEW DELHI (Reuters) - The retail inflation slowed to a two-year low in January, providing some relief to the ruling Congress party ahead of national polls, but a third straight fall in industrial output in December offered little hope for an economic rebound.
Opinion polls ahead of the elections - expected between April and May - predict major losses for the ruling party, in part for its failure to control inflation and revive an economy that is growing at around its slowest pace in a decade.
Cooler food prices helped bring down the overall retail inflation to 8.79 percent last month, its lowest level since January 2012.
But core retail inflation remained sticky at around 8 percent, which new Reserve Bank of India (RBI) chief Raghuram Rajan has deemed uncomfortably high.
Persistently high inflation prompted Rajan to raise interest rates last month, the third hike since September, even though economic growth has been stuck around a decade-low of 4.5 percent for four quarters. He is due to review rates in April.
"We will continue to see some comfort on the inflation trajectory front in the next couple of months," said Shubhada Rao, chief economist at Yes bank in Mumbai.
"The risk of a rate hike in April does not exist unless there is a very sharp negative surprise in core CPI (retail inflation) data in the next reading in March."
Last month, a central bank panel proposed revamping its policymaking structure by setting a long-term retail inflation target of 4 percent, plus or minus 2 percent.
In the intermediate term, it proposed the goal would be to bring it down to 8 percent by January 2015 and 6 percent by January 2016.
Food inflation slowed to 9.90 percent, sharply lower than 12.16 percent in December, helped by a 13 percent fall in vegetable prices as supplies improved following a bumper harvest.
A surge in vegetable prices was one of the principal reasons for the drubbing the Congress party received in recent state elections. Items such as onions, which figure into almost every Indian meal, had shot up in price by up to 190 percent in late 2013, but now have fallen more than 85 percent.
"In August-September farmers got significantly higher returns for vegetables. It prompted them to increase acreage," said Vilas Bhujbal, a Pune-based trader. "Now the market is oversupplied with vegetables like potato and onions. Prices will remain under pressure in next few months."
Industrial production shrank 0.6 percent in December, its third contraction in a row although the fall was smaller than the -1.0 percent forecast by analysts in a Reuters poll and a revised 1.3 percent decline in November.
The reading has fallen 0.1 percent in the first nine months of the 2013/14 fiscal year, which ends in March.
Weak industrial numbers forced the government last week to revise down its growth forecast for this fiscal year to 4.9 percent from 5 percent, and Wednesday's industrial production figures offered little hope of a turnaround.
Capital goods production, a barometer for investments in the economy, shrank 3 percent in December from a year earlier. The sector has contracted in seven out of the past nine months.
The production of consumer goods, a proxy for consumer demand, fell an annual 5.3 percent. The sector has grown just once in last eight months.
(Additional reporting by Rajendra Jadhav and Swati Bhat; Editing by Catherine Evans)
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