India's headline inflation rate eased from two-year highs to below 6 percent in mid-January due to a fall in food prices, but analysts still expect an interest rate rise at next week's monetary policy review.
Data on Thursday showed the wholesale price index rose 5.95 percent in the 12 months to January 13, in line with the median forecast in a Reuters poll and slower than the previous week's annual rise of 6.12 percent, which was a two-year high. Despite four increases in its main lending rate last year and measures by the government this week to curb commodity prices, analysts said the central bank still needed to raise borrowing costs on January 31 to check inflation expectations and rapid credit growth.
"Headline inflation is likely to stay firm in the near term," said Indranil Pan, chief economist at Kotak Mahindra Bank in Mumbai. "We expect the central bank to raise rates by 25 basis points in both the repo and the reverse repo rate next week." Finance Minister Palaniappan Chidambaram has said the spurt in inflation was a concern.
This week the government cut import duty on cement, steel, copper, aluminium, capital goods and some edible oils to cool inflationary expectations. "We would have done it anyway on February 28 (in the annual budget). Having regard to inflation, we advanced the duty cuts," Chidambaram told reporters on Thursday, adding that the impact would be felt in two weeks.
Asked whether the government would take any more fiscal steps to curb inflation, Chidambaram said: "We will see." Fourteen out of 15 economists polled by Reuters before the WPI data expected the Reserve Bank of India (RBI) to raise its short-term lending and borrowing rates by 25 basis points next week.
It lifted its main lending rate, known as the repo rate, four times last year to 7.25 percent in an effort to rein in credit growth and rising prices. It has also increased the amount of cash banks must deposit with the central bank.
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