Indian inflation edges up, policy outlook unchanged

By Surojit Gupta

NEW DELHI (Reuters) - Indian inflation inched up to its highest in more than four months in mid-January, but Friday's data did little to dampen growing expectations that the Reserve Bank of India (RBI) will cut rates at a quarterly policy review on Jan. 29.

The wholesale price index rose 3.83 percent in the 12 months to Jan. 12, marginally higher than the previous week's rate of 3.79 percent and matching the median forecast in a Reuters poll.

While the highest rate since late August, it was the 32nd week that annual inflation has been below 5 percent, the RBI target level for the fiscal year ending in March.

"Inflation is probably not going to perk up immediately. So the RBI is likely to cut its rate following an aggressive interest rate cut by the Federal Reserve," said Indranil Pan, chief economist at Kotak Mahindra Bank.

Seven out of 13 analysts polled by Reuters this week forecast the central bank would cut its repo rate by a quarter percentage point to 7.50 percent at next week's policy review. The others forecast no change.

The yield on the 10-year federal bond was at 7.40 percent, steady from before the data release, while the rupee was unchanged at 39.40/41 per dollar.

The RBI, which raised rates five times in the 10 months to the end of March 2007, aims to condition inflation expectations to around 4.0-4.5 percent and has a medium-term goal for inflation of about 3.0 percent.

The government is debating whether to increase retail prices of fuel, which it caps to protect the poor and tame inflation. Analysts say a fuel price rise could bump annual inflation above four percent.

A government panel warned last week of continued inflationary pressure in 2008/09, and said high global oil and commodity prices would make inflation management "quite challenging".