Aug WPI inflation eases to near five-year low of 3.74 percent

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's wholesale price inflation eased to its lowest level in nearly five years in August, but the central bank is likely to keep interest rates on hold later this month to prevent a revival in price pressures once the economy gains momentum.

The wholesale price index (WPI) rose 3.74 percent year-on-year last month, helped to its slowest pace since October 2009 by a favourable statistical base and falling global crude oil prices, which dropped to a two-year low on Monday.

A Reuters poll of economists had expected annual WPI inflation of 4.50 percent in August.

This is the last major economic data before the Reserve Bank of India's (RBI) policy review on Sept. 30.

Data released on Friday had shown consumer price inflation, which the central bank tracks to set policy lending rates, edged down marginally to 7.8 percent in August.

The RBI wants to reduce retail inflation to 6 percent by 2016. The central bank left the repo interest rate steady at 8.0 percent last month and is widely expected to do the same at its upcoming policy review to ensure sustained disinflation next year.

"Retail inflation is the main barometer for policy decisions and unless that tapers off towards the January 2016 target at 6 percent, rate cuts are unlikely to be in the picture," said Radhika Rao, economist at DBS bank in Singapore.

"We maintain that the repo rate will be held unchanged for rest of the year to ensure recovery in growth does not disrupt the disinflationary trend."

Improved rainfall in recent weeks should help to moderate food price pressures, lower global oil prices and the favourable statistical base should help lower inflation, but there were counter-forces to consider.

Aside from prospects of a pickup in domestic consumption stoking price pressures, there was also the possibility that imported goods could become more expensive if the rupee weakens against the dollar, due to expectations that the U.S. Federal Reserve could raise interest rates sooner-than-expected.

Wholesale prices for fuel rose an annual 4.54 percent last month, sharply slower than a 7.40 percent year-on-year gain in July.

RBI chief Raghuram Rajan has said falling oil prices could be a "temporary phenomenon", and there are risks that prices could flare up again due to geopolitical tensions in the Middle East or Ukraine.

Food inflation, meanwhile, eased to 5.15 percent in August from 8.43 percent in the previous month. However, the prices were up 2.6 percent from July.

"While all the current set of economic indicators indicate that inflation is heading lower, Rajan wants to temper expectations and highlight the possibility that prices may still go up in the future," said Killol Pandya, senior fund manager - debt at LIC Nomura asset management.

"We believe the central bank will wait for a couple of more prints before it definitively makes up its mind about the direction of inflation."

(Reporting by Rajesh Kumar Singh; editing by Malini Menon and Simon Cameron-Moore)