India's inflation hits 5-year low, fans rate cut hopes

[NEW DELHI] India's wholesale inflation cooled to a fresh five-year low as fuel and food prices fell, firing hopes the hawkish central bank could finally start cutting interest rates and spur stumbling economic growth.

The Wholesale Price Index or WPI, India's inflation measure with the biggest goods basket, slipped to a better-than-expected 1.77 per cent in October from a year earlier.

Wholesale inflation is now at its weakest since September 2009 as the fuel-import-reliant nation benefits from tumbling global oil prices.

The central bank "could begin to cut rates soon - perhaps even as early as December", said Shilan Shah, analyst at macroeconomic research firm Capital Economics.

The data swept the Bombay Stock Exchange's benchmark index to a record high of 28,046.66 points.

Wholesale inflation, which was 2.4 per cent in September, has fallen from over six per cent in May.

The annual wholesale inflation decline was also helped by bountiful harvests which pushed down food prices. The cost of onions, an Indian cooking pot staple, has fallen nearly 60 per cent from a year ago.

Business leaders and finance minister Arun Jaitley, a member of Prime Minister Narendra Modi's new right-wing government, have been clamouring for a cut in borrowing costs which they say deter investment and consumer spending.

India has been mired in its longest stretch of sub-five-per cent growth in a quarter-century.

The economy grew by 4.7 per cent last year and the central bank expects it to expand by 5.5 per cent this year - far below the near double-digits needed to generate jobs for tens of millions of new entrants.

The wholesale price data came days after figures showed the consumer inflation index, comprised of a widely tracked smaller goods basket, dropped to a far better-than-expected 5.52 per cent last month.

That figure was also below the central bank's six-per cent goal for January 2016, and down sharply from double-digit inflation last year.

But even with inflation falling faster-than-expected, the central bank has resisted appeals to loosen monetary policy and boost growth.

It says it's determined to "break the back" of inflation - a chronic problem that causes misery for India's hundreds of millions of deeply poor citizens and a major restraint on growth in the emerging-market nation.

Some economists say the central bank could cut rates at its next policy meeting slated for December 2.

But other economists worry inflation will resurge when a low statistical base-effect, which has helped make price rises look weaker, wears off. They say any premature easing of rates could stoke prices.

"We still expect the Reserve Bank of India to remain on hold as risks remain to the six-per cent inflation target for January 2016," said Goldman Sachs economist Tushar Poddar.

Economists who are sceptical the latest inflation fall will be sustained suggest the central bank may hold its trend-setting lending rate at eight per cent until at least mid-2015.

Central bank governor Raghuram Rajan, himself, has signalled caution on rate-cut hopes.

"Base effects will temper inflation in the next few months - only to reverse towards the end of the year," Mr Rajan said in a recent speech. "The Reserve Bank will look through base effects."

AFP