NEW DELHI (Reuters) - India's headline inflation unexpectedly eased to its slowest pace in eight months in October, a welcome relief from a string of bad data but still high enough to be a headache for policymakers struggling to balance the need for growth with taming prices.
Wholesale prices - India's main inflation gauge - rose an annual 7.45 percent, the slowest pace since February, government data released on Wednesday showed.
The figure was slower than the 7.81 percent recorded in September, as food and fuel prices rose less quickly, and less than the 7.96 percent predicted in a Reuters poll of analysts.
With India's economy on track to grow at its worst pace in a decade, and a general election due in just over a year, the government has been pressing the Reserve Bank of India (RBI) to cut interest rates to revive growth. But the central bank has rebuffed those calls, saying prices are still rising too fast to risk loosening policy.
The latest inflation reading is still seen as too high for the RBI to bow to pressure from the government and businesses by cutting rates at its next policy review in December. However, it could do so early next year.
"Despite the downtick, elevated inflation will prevent the RBI from easing aggressively," said Jyoti Narasimhan, senior principal economist, IHS Global Insight.
"With inflation unlikely to recede substantially, we no longer expect the RBI to soften its stance and cut policy rates on 18 December to support flagging economic growth."
India's financial markets were closed on Wednesday for a festival.
India rates, WPI graphic link.reuters.com/saq26s
Data on Monday showed the monthly trade deficit climbed to its highest-ever level, while industrial production surprisingly contracted, dashing hopes that the economy was regaining traction.
Prime Minister Manmohan Singh's government is trying hard to get the economy back to the near double-digit growth that helped project India as a rising global power and helped Singh's Congress party win two back-to-back elections since 2004.
But with state polls looming and a general election due in 2014, an economic revival would help Singh generate resources to fund big-ticket welfare programmes meant for his party's core constituency comprising poor and rural voters. It would also help mitigate anger at rising prices.
Singh said in a speech over the weekend that his government had "dispelled doom and gloom" about the economy with a series of policy steps, including curbing fuel subsidies and liberalising foreign investment rules.
But investors are clamouring for the government to do more. They want Singh to push ahead with a reform agenda that has progressed fitfully, calling for a more business-friendly tax regime and speedier clearances for infrastructure projects.
Singh has faced opposition to flagship policies from powerful regional allies as well as opposition parties, setting the stage for another stormy parliament session when it reconvenes on Nov 22.
"The (inflation) number is better than what most people had expected, but based on the past experiences there is a likelihood of the numbers getting revised," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
The government revised up August inflation to 8.01 percent from the 7.55 percent initially reported.
"The Reserve Bank will wait till the headline inflation falls by 100 basis points more. The government is putting on pressure, but the Reserve Bank will not succumb to that pressure until the inflation comes down to the comfort zone," Rupa Rege Nitsure said. (Additional reporting by the Mumbai bureau and Arup Roychoudhury in New Delhi; Editing by Simon Cameron-Moore & Kim Coghill)