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India’s headline inflation eases slightly in October

NEW - India’s annual headline inflation eased slightly in October to its lowest in 10 months, possibly allowing the central bank to keep rates steady in coming months even though price rises remain above its comfort level.

India’s wholesale prices rose 8.58 percent in October from a year earlier compared with 8.62 percent in September, data on Monday showed. The figure compared with a Reuters poll forecast for an 8.44 percent rise.

Food inflation slowed to 14.1 percent in October compared with 15.7 percent a month earlier as supplies improved after healthy monsoon rains, helping bring down overall inflation.

The data, coming on the heels of the slowest annual growth in industrial output in 16 months, lends support to those who advocate a pause in the Reserve Bank of India’s (RBI) tightening, although others say further rate increases are needed.

“With this number against the weak IIP (industrial output) last week, our view that the RBI will not hike further in the current fiscal year becomes even stronger,” said Anubhuti Sahay, economist at Standard Chartered Bank in Mumbai.

Finance Minister Pranab Mukherjee said on Monday that the full impact of the central bank’s past rate hikes on inflation had yet to be seen and that he expected headline inflation to fall to 6 percent by March, when the fiscal year ends.

Markets were little moved by Monday’s figures, which traders said were broadly in line with expectations and, together with production data, all but ruled out the possibility of a rate increase at the central bank’s December review.

The benchmark 10-year bond yield held around 8.05 percent, little changed from Friday when it eased from last week’s peaks at 8.11 percent.

Caution over data

While the central bank indicated early this month that it was unlikely to raise rates again in the next three months, some economists said much more tightening was needed to bring inflation down.

“In our view, the persistence of elevated inflation readings will be the dominant factor over the weak IIP numbers,” said Robert Prior-Wandesforde, head of India and Southeast Asia economics at Credit Suisse in Singapore. Prior-Wandesforde expects 75 basis points of further tightening by mid-2011.

The RBI has raised its key lending and borrowing rates by a total of 150 and 200 basis points, respectively, this year in its efforts to squeeze inflation back to its target of 5.5 percent by March.

The central bank’s next monetary policy review is on Dec. 16. Analysts polled by Reuters expect the central bank to raise rates by additional 25 basis points by the end of the fiscal year that ends in March. RBI Deputy Governor Subir Gokarn on Saturday voiced concern about industrial output growth easing for the second straight month in September and said the central bank would be in a “wait and watch” mode.

The US Federal Reserve’s decision to pump further $600 billion into the financial system may also persuade the Indian central bank to keep rates on hold to avoid a further surge in capital inflows from slow-growth low-yielding developed markets.

Malaysia was the latest Asian economy that left interest rates unchanged, wary of risks posed by capital inflows.

Double-digit food and fuel price rises, however, are set to keep the central bank on alert for price pressures further down the road. October fuel prices were 11 percent higher than a year earlier, while manufacturing inflation — the central bank’s proxy gauge of demand — rose to 4.75 percent from 4.59 percent in September.