Wholesale inflation eases to 9-month low, rates seen on hold for now

NEW DELHI Fri Mar 14, 2014 3:57pm IST

1 of 2. A labourer pushes a hand cart loaded with sacks of rice at a wholesale market in Kolkata March 14, 2014.

Credit: Reuters/Rupak De Chowdhuri

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NEW DELHI (Reuters) - India's wholesale price-based inflation eased to a nine-month low in February as food and fuel prices moderated, raising expectations that the Reserve Bank of India (RBI) would leave interest rates unchanged at its policy review next month.

The wholesale price index (WPI), long regarded as India's main inflation measure, rose 4.68 percent last month, data showed on Friday, compared with a 4.99 percent jump forecast by economists in a Reuters poll.

A 10 percent drop in wholesale vegetable prices from January helped overall inflation ease for the third straight month.

Friday's data comes on the heels of a faster-than-expected slowdown in consumer inflation, which eased for a third straight month to a 25-month low of 8.10 percent in February.

"For policy, CPI is more relevant and based on latest CPI reading, we expect RBI to keep rates steady in the April policy review," said A. Prasanna, an economist at ICICI Securities Primary Dealership Ltd in Mumbai.

"It (WPI) was in line with expectations. However, the next reading could go up on back of higher food prices and the base effect."

The rupee and federal bond prices were unchanged after the data.

In its bid to tamp down inflation, the RBI has raised interest rates three times since September. It will next review them on April 1.

While cooling prices have raised odds that rates will be left on hold for now, some market watchers say the reading on core inflation could determine the eventual outcome of the upcoming monetary policy review.

Core WPI inflation, which strips out volatile food and fuel prices, accelerated to 3.15 percent from 3 percent in January.

Elevated core inflation prompted new RBI chief Raghuram Rajan to deliver a surprise rate hike of 25 basis points in January.

"Even with tepid growth and falling inflation, the RBI is unlikely to lose its focus on managing inflation expectations," analysts at Barclays wrote in a note after the data.

"Of late, Governor Raghuram Rajan had indicated that interest rates are appropriate now, but CPI inflation and inflation expectations will need to be lowered over time in order to generate sustainable growth. We expect the RBI to continue to focus on services inflation and wage-price pressures, which it views as 'sticky'."

The outlook on food prices could also influence his rate decision. Hail and heavy rains in the past two weeks have damaged crops, which may push up food prices again.

An uncertain outlook for this summer's monsoon rains due to the El Nino weather pattern is also worrying policymakers.

Any flare-up in food prices will not be a good news for the ruling Congress party. It is seeking a third term in national elections that begin on April 7.

The party is trailing in most opinion polls and is widely expected to be defeated, in part due to its failure to control inflation and arrest the country's economic slowdown.

(Reporting by Rajesh Kumar Singh; Editing by Kim Coghill)

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