NEW DELHI (Reuters) - India's headline inflation picked up for the first time in five months on higher food prices, giving the central bank a reason to hold off on a much-awaited interest rate cut when it reviews its policy on Thursday.
The wholesale price index, India's main gauge of inflation, edged up 6.95 percent in February from a year earlier. It was higher than the 6.79 percent average forecast in a Reuters poll, after a provisional rise of 6.55 percent in January.
"The key trend that needs to get captured is on core inflation, which is at a 15-month low, and that is something that should go as a positive for monetary policy.
"We still believe the RBI could look at a repo rate cut of 25 basis points tomorrow."
"Momentum of non-food manufacturing inflation, or core inflation, is not easing month-on-month as was expected. Growth is also not collapsing as shown by the January data and global crude oil prices are rising. All this means that a rate cut is ruled out at Thursday's policy meeting.
"Uptick in crude oil prices will definitely have an impact on RBI policy since the issue can be tackled only by raising retail prices or allowing fiscal deficit to go higher.
"Also the central bank has little room to prop up the rupee as inflows are not rushing into India. Therefore, the RBI will prefer to wait for one more month before moving on rates."
"While a higher print in February was expected as the base effect was less favourable this month when compared to January, the number has still surprised on the upside. Price pressures in both food articles and non-food articles were higher than our expectation and along with fuel prices (once administered fuel products prices are revised) can pose further upward pressure on the headline inflation.
"On the positive side, a fall in core inflation should provide comfort to the RBI. However, with the headline inflation still at near 7 percent, probability of rate cut tomorrow has reduced further. We expect no change in the repo rate when RBI meets for its mid-term policy meeting."
SUJAN HAZRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI
"It is higher than our expectation. But if you see the underlying numbers, it's not so much from the manufacturing side, which is the relevant number as far as the policy decision is concerned.
"Our sense is that non-food manufacturing inflation will maintain the downward trajectory at least till June, which will enable the RBI to start cutting rates."
"The high uncertainty surrounding the price pressures is likely to keep the RBI on a pause mode in tomorrow's meeting. However, an easing core inflation figures may provide some comfort."
"I think the big risk going forward for inflation will be driven by the revision in the domestic fuel prices, and we do expect inflation to sustain around 7 percent until March. The inflation rate may bottom out to around 5.7-6.0 percent in August-September, and then inch back to around 7 percent.
"The broad balance is in favour of a rate cut, but I would think the Reserve Bank of India would wait until it gets a firm fix on the contours of the budget."
"With inflation at near 7 percent and with IIP (index of industrial production) growth on a much better platform we do not expect the RBI to cut rates immediately in March. We retain our view for the first cut of 25 basis points in April.
"Imported inflation from oil may not be a concern unless they pass on the higher prices to the end users. But to a certain extent it seems that the RBI is keen to contain the rupee trends to contain imported inflation.
"For food inflation, there might not be too much of a softening trend. Only reason why food inflation is lower now is due to the vegetables segment. The worry on inflation could be magnified if the fiscal compression does not happen, and the feeling is that there might not be much of a fiscal compression anyways."
"This figure is still a repressed number because the complete pass-through of global oil prices has not happened. If you take just the direct impact of global oil prices at current levels, then the headline inflation number could at least be 90-100 basis points higher.
"The Reserve Bank of India would start lowering interest rates in the next fiscal year 2012/13, but given the fiscal slippage of the government the pace would be gradual. I don't expect the RBI to cut interest rates before the annual monetary policy statement in April."
"The sharper-than-expected rise is negative for the INR and should push INR OIS rates up, especially at the short end, as it almost guarantees no rate cut this week. We still see a cut in Q2."
* The benchmark 10-year 8.79 percent, 2021 bond was steady at 8.35 percent immediately after the data.
* The benchmark five-year swap rate and the one year swap rates were unchanged at 7.53 percent and 8.10 percent, respectively.
* The partially convertible rupee was unmoved at 49.9 per dollar.
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- The Reserve Bank of India is expected to hold interest rates steady at its policy review on Thursday ahead of the federal budget, a Reuters poll showed on Monday.
- India's factory output grew at its fastest in seven months in January, powered by a surge in manufacturing including consumer non-durables, and is likely to give some space to the RBI to defer its policy easing.
- Finance Minister Pranab Mukherjee is expected to announce measures, including increase in tax rates to trim federal fiscal gap, when he presents the annual federal budget on Friday.
- The RBI last week slashed the cash reserve ratio (CRR), the proportion of deposits that banks must keep with the central bank, by 75 basis points.
- Car sales in India rose an annual 13.1 percent in February as buyers rushed to showrooms ahead of a budget seen raising the cost of vehicles.
- India's services sector lost momentum in February and firms shed workers for the first time in three months, a business survey showed.
- India's economic growth slowed to 6.1 percent in the three months to December. The government has forecast the economic growth in the fiscal year ending March 31 to dip below 7 percent for the first time in three years.
Reporting by India Treasury Team; Editing by Ranjit Gangadharan