Sept WPI inflation hits near 5-year low, rates still seen on hold

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's wholesale price inflation eased to a near five-year low in September, helped by a moderation in food and fuel prices, but the risk of price shocks is expected to prevent the central bank from cutting interest rates soon.

The wholesale price index (WPI) rose an annual 2.38 percent last month, its slowest pace since October 2009, compared with a 3.3 percent jump forecast by economists in a Reuters poll. In August, wholesale prices rose 3.74 percent.

Tuesday's data comes a day after consumer price inflation, which the central bank tracks to set policy lending rates, dropped sharply to 6.46 percent in September, the lowest since the latest data series started in January 2012.

"The sharp moderation in inflation has been a culmination of a favourable base effect, moderation in food prices, softening crude oil prices and weak growth," said Upasna Bhardwaj, an economist at ING Vysya bank.

Economists, however, say the real picture of inflation will emerge only after November when the base effect fades out and the impact of a sub-normal monsoon rains on summer-sown crops are more visible.

"We will see the lowest reading for inflation in November due to the statistical base effect," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

"So it needs to be seen post-December how inflation pans out as the Reserve Bank of India (RBI) wants inflation to come down on durable basis."

Lower vegetable prices help drive down wholesale food inflation to a near three-year low of 3.52 percent in September. Fuel inflation hit a near five-year low of 1.33 percent on falling global crude prices.

A faster-than-expected deceleration in inflation will be welcomed with relief by a country that has been struggling to overcome a prolonged spell of low growth and high inflation.

A promise to pull the economy out of this malaise handed Prime Minister Narendra Modi the strongest electoral mandate in 30 years in May.

HOPE & CHALLENGES

A sustained fall in global oil prices, which are down more than 20 percent from the 2014 high in June, has brightened the near-term inflation outlook.

Since India imports more than 70 percent of its oil, every $10 a barrel fall in global prices should lower retail inflation by 20 basis points and wholesale inflation by 50 basis points.

A relatively stable rupee, weak domestic demand and a favourable statistical base are also expected to rein in price pressures.

Still, the RBI is expected to keep interest rates on hold until the April-June quarter on concerns that poor monsoon rains and geopolitical tensions that affect oil could drive up prices and make it tougher to reduce retail inflation to 6 percent by January 2016.

"Going into next year, we expect RBI to assess the diminishing upside risks to its 6 percent target closely and press the trigger only when it is convinced of a meaningful correction in prices," said Bhardwaj of ING Vysya bank.

The RBI sent a strong signal last month that it would hold off cutting rates until it was confident that consumer inflation would hit its 2016 target.

India's benchmark 10-year bond nevertheless rose to a 13-month peak on Tuesday, buoyed by a faster-than-expected cooling in retail prices. Bond traders are now pricing in a more aggressive monetary easing next year.

(Additional reporting by Swati Bhat and Neha Dasgupta in Mumbai; Editing by Eric Meijer)