India WPI eases to 8-month low as food prices moderate

The wholesale price index, or WPI, long regarded as India’s main inflation measure, rose 5.05 per cent last month, data showed on Friday, compared with a 5.80 per cent jump forecast by economists in a Reuters poll.

In December, wholesale prices rose 6.16 per cent.

But in a worry for new Reserve Bank of India chief Raghuram Rajan, core WPI inflation inched up to three per cent last month, which analysts said was its highest level since April 2013.

“The euphoria over the moderation in the headline number needs to be balanced by the core inflation number which has inched up,” said Siddhartha Sanyal, India economist at Barclays.

“At the moment, Governor Rajan has given enough indication of staying on hold. I don’t expect Rajan to raise rates in April as inflation is easing and core inflation is not very high.”

However, federal bond prices fell after the data on worries that a pickup in core inflation could evoke a hawkish response from Rajan when he next reviews monetary policy in April.

The benchmark 10-year bond yield rose two basis points to 8.83 per cent after the WPI data. The yield initially had fallen to as low as 8.79 per cent.

Persistently high inflation prompted Rajan to raise interest rates last month, the third hike since September, even though economic growth has been stuck below five per cent for the past four quarters. Friday’s data comes days after cooler food prices helped retail inflation ease to a two-year low of 8.79 per cent in January. It will offer some relief to the ruling Congress party which is seeking a third straight term in upcoming national elections.

Opinion polls ahead of the elections — expected between April and May — predict major losses for the ruling party, in part for sagging economic activity and its failure to control inflation.

Runaway prices, particularly those of vegetables, were one of the principal reasons for the drubbing the Congress party received in recent state elections.

Food inflation slowed to 8.80 per cent in January from 13.68 per cent in December, as vegetable prices fell 21 per cent month-on-month.

Rising prices amid the economic slowdown have pressured household budgets and company profits, hitting consumer demand as well as corporate investments. Industrial production shrank 0.6 per cent on year in December, its third contraction in a row, dragged down by weak investment and consumer demand.

Last month, a panel set up by Rajan recommended the RBI pursue managing inflation as its main policy objective. It suggested setting a long-term retail inflation target of four per cent, plus or minus two per cent.

In the intermediate term, the panel proposed the goal would be to bring it down to eight per cent by January 2015 and six per cent by January 2016.

India is among a handful of large emerging economies that does not target inflation.