India's inflation has fallen to a 16-month low, data on Friday showed, but analysts said price pressures were still strong in the fast-growing economy and forecast monetary policy would remain hawkish.
The wholesale price index, India's closest watched cost-of-living monitor, showed annual inflation slowed to a lower-than-expected 3.79 percent for the week ended August 25, down from 3.94 per cent a week earlier. Analysts had expected inflation to fall to around 3.9 percent.
But no immediate monetary easing was on the cards, analysts said, citing the central Reserve Bank of India's recent warning that higher oil, property and other prices risked stoking inflation. "If I read the Reserve Bank correctly on inflation risks, I don't think it is going to change its (monetary) policy for a long period of time," said D.K. Joshi, economist at leading credit rating agency Crisil.
The lower inflation was driven by some cheaper food and manufactured goods as well as by a higher base effect. Inflation stood at 5.27 percent the same time a year ago. The bank said in its annual report last week "continuous vigil" was needed to guard against inflation that has emerged as a major political issue in India.
The Congress-led government - mindful that rising costs can be political dynamite among India's poor masses who helped propel it to power in 2004 - says price stability is one of its top priorities. But it is also keen to ensure that monetary policy does not choke off growth needed to lift millions out of poverty.
With international crude oil prices at 76 dollars per barrel "the (inflation) outlook is one of caution," Finance Minister P. Chidambaram told reporters. Media reports say the petroleum ministry wants a rise in government-set retail prices to staunch losses at state-owned oil firms amid rising crude prices, a move that would propel inflation higher.
Soaring world wheat prices that have forced countries like India to pay record prices for imported wheat are also a concern. The central bank, which holds its next policy meeting on October 30, began tightening in October 2004 and has driven borrowing costs to five-year highs in its bid to tame prices.
The tightening has led to forecasts that economic growth will slow this year to around 8.5 percent to 9.0 percent from last year's blistering 9.4 percent, the fastest expansion in nearly two decades. Sales of cars and other consumer goods have already fallen as loans have become more expensive.