India's WPI inflation at three-month high may limit central bank policy scope

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's wholesale price inflation hit a three-month high in March, snapping an easing trend that will give the central bank less scope to support the economy amid fresh signs of slowdown.

A pick-up in inflation, coupled with a slump in industrial production and merchandise exports and the risk of less-than-normal monsoon rains this summer, calls into question assumptions that the worst is over for Asia's third-largest economy.

The wholesale price index (WPI), long regarded as India's main inflation measure, rose a much faster-than-expected 5.70 percent last month from a year earlier, on higher food, fuel and manufacturing costs. It was the quickest pace since December 2013 and snaps a three-month easing trend.

The rise compared with a 5.30 percent increase forecast by economists in a Reuters poll. In February, wholesale prices, rose 4.68 percent, their slowest pace in nine months.

The reading for January WPI inflation was also revised up to 5.17 percent from 5.05 percent earlier.

Radhika Rao, an economist at DBS Bank reckons the data has raised the odds for a significant jump in consumer price data due at 1200 GMT on Tuesday.

Retail inflation was expected to have quickened to 8.19 percent in March from a 25-month low of 8.10 percent a month ago, according to the median forecast of a Reuters poll.

That will be a worry for the central bank which aims to bring down retail inflation to 6 percent by January 2016.

After raising lending rates three times since last September, the Reserve Bank of India (RBI) left its policy repo rate unchanged at 8 percent this month.

"The RBI is likely to stay concerned on the inflation outlook and stick to the tight policy stance," Rao said.

"Policy bias will be for further rate hikes in the second half of FY14/15 when the potential El Nino development and impact on southwest monsoon become more apparent."

India's 10-year benchmark bond yield jumped 3 basis points to 9.03 percent after the WPI data.

India has been battling a prolonged spell of high inflation and low growth. While economic growth has almost halved to below 5 percent for the past two years, the worst slowdown for the South Asian nation since the 1980s, retail inflation has been averaging around 10 percent.

A sharper-than-expected cooling in vegetable prices in the past three months had raised hopes of breaking out of that spell. But recent unseasonal hail and heavy rains in parts of the country have damaged crops and driven up food prices again.

A continuing slump in investment and consumer demand resulted in a surprise 1.9 percent annual contraction in industrial output in February, which compared with analysts' median forecast of 0.9 percent growth. Exports fell for a second straight month in March, widening the trade deficit to a five-month high.

EL NINO THREAT

Compounding growth worries is an uncertain outlook for summer monsoon rains due to a possible El Nino weather event that affects wind patterns and can trigger both floods and drought.

Australia's Bureau of Meteorology last week predicted that the chance of an El Nino weather event developing in 2014 now exceeded 70 percent.

A strong El Nino in India would trigger lower production of summer crops such as rice, sugarcane and oilseeds. In 2009, it had turned monsoon rains patchy, leading to the worst drought in nearly four decades which shot annual food inflation up to more than 21 percent.

Such a scenario would further compound the challenges awaiting a new government that takes over in New Delhi after national elections in May.

Persistently high inflation has become a feature of the Indian economy in the last five years and is widely expected to haunt the ruling Congress party in the elections which began last week.

The opposition Bharatiya Janata Party's leader Narendra Modi, a hot favourite to head the next government, has been relentless in his attack on the ruling alliance over its failure to cool prices, demanding an apology for "cheating" the country.

Modi says he will create a price stabilisation fund to combat inflation and set up special courts to try those who hoard goods.

(Editing by Jacqueline Wong)