WPI down again, but price pressures building

By Rajkumar Ray and Manoj Kumar

NEW DELHI (Reuters) - India's wholesale price index remained negative in annual terms in mid-July but analysts said inflation would soon return and the central bank was right to leave interest rates steady at a policy review this week.

The widely watched wholesale price index fell 1.54 percent in the 12 months to July 18, its seventh successive fall, compared with a 1.17 percent drop in the prior week and a market forecast of a 1.46 percent fall.

Food prices rose 1.2 percent from the previous week and the government revised up the May 23 inflation reading to 1.34 percent from 0.48 percent.

"The WPI has been consistently under-estimated. There has been a huge discrepancy between the provisional and actual WPI numbers," said N.R. Bhanumurthy, an economist with National Institute of Public Finance and Policy.

"Inflation expectations are high and there is no scope for more interest rate cuts."

At a policy review on Tuesday, the Reserve Bank of India revised its inflation estimate up to 5 percent at the end of March 2010 from 4 percent, and left key policy rates unchanged to help an economic recovery.

The WPI has been rising on a weekly basis since March as price pressures slowly build up. The consumer price index, which has a greater weighting on food items, rose 8.63 percent in May from a year earlier.

"Impact of delayed monsoons on food prices, some recovery in prices of manufactured goods in the second half as well as the base effect will likely take inflation much higher towards end of last quarter," said Shubhada Rao, chief economist of YES Bank.