CPI eases to three-month low as food prices cool

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's retail inflation in December eased to a three-month low as vegetable prices fell, giving some relief to policymakers struggling to contain price pressures as growth hovers at a decade low.

Retail prices rose an annual 9.87 percent last month, slower than the 9.92 percent expected by economists in a Reuters poll. Prices had surged a revised 11.16 percent year-on-year in November - their fastest pace on record.

The moderation was largely driven by a fall in vegetable prices, which cooled nearly 19 percent from November on improved supplies. That helped slow down annual food inflation to 12.16 percent last month from 14.72 percent in November.

Still prices of cereal, milk and eggs are rising, which will likely keep overall inflation elevated.

"Consumer inflation will likely range between 9.5 to 10 percent at least until March," says Madan Sabnavis, chief economist at Care Ratings.

Retail inflation has been averaging nearly 10 percent for the past two years and has been the main factor in driving up wage costs as rural wages are benchmarked to consumer prices.

Monday's data also comes on the heels of a surprise contraction in industrial production and a slowdown in merchandise exports growth, which have dampened hopes of a rebound in Asia's third-largest economy.

GRAPHICS:

For graphics on India WPI, CPI: http://link.reuters.com/zar28t

India food inflation: http://link.reuters.com/rad33v

CENTRAL BANK IN A FIX

For the past four quarters, economic growth has been stuck below 5 percent while prices are rising. This is straining household budgets and corporate balance sheets.

It is also a worry for the ruling Congress, seeking a third term in national elections expected to be held between April and May. Most opinion polls are predicting major losses for the party, in part due to its handling of the economy.

Sluggish growth and high inflation have put the central bank in a quandary.

Although new Reserve Bank of India (RBI) Governor Raghuram Rajan reckons price stability is a prerequisite for reviving India's economic growth, he left the lending rate unchanged last month, fearing that aggressive rate hikes could prolong the slowdown.

Rajan has raised interest rates twice after taking over in September and is due to review rates on January 28. He has warned of another hike, if headline as well as core inflation numbers do not moderate substantially.

While headline retail inflation came below 10 percent in December, core inflation is still around 8 percent, which Rajan deems as uncomfortably high.

Still, not many economists expect him to move interest rates this month.

"We expect the RBI could hit status quo stance again although our original expectation was of a 25 basis points rate hike in January," said Shubhada rao, chief economist at Yes Bank.

The RBI will also monitor data on wholesale prices due on Wednesday ahead of its rate decision.

Wholesale inflation, the main inflation gauge, surged to a 14-month high of 7.52 percent in November after food prices rose at the fastest clip since June 2010.

(Additional reporting by Neha Dasgupta in Mumbai; Editing by Alison Williams)