Indian retail inflation lowest in at least five years

By Rajesh Kumar Singh

NEW DELHI (Reuters) - India's inflation cooled to its lowest in at least five years in January as food prices fell following the government's cash clampdown, but emerging price pressures mean the Reserve Bank of India (RBI) will probably keep interest rates on hold.

Consumer prices rose by an annual 3.17 percent last month - their slowest pace since January 2012, when the government launched the current index series.

Economists surveyed by Reuters had expected prices to rise by 3.22 percent from a year earlier, compared with December's 3.41 percent increase.

Annual retail food inflation eased to 0.53 percent last month from 1.37 percent in December, helped by lower prices for vegetables and pulses, government data showed on Monday.

In a worry for the central bank, another inflation gauge that excludes volatile food and fuel prices accelerated to around 5.1 percent in January, after hovering around 4.9 percent since September.

The RBI's monetary policy committee reckons sticky core inflation could trigger wide side-effects.

"The RBI is seeing upside risks to inflation and one data point is not going to change their view dramatically," said Varun Khandelwal, managing director at Bullero Capital.

"Interest rates will remain on hold in the near term."

Headline inflation has been under 4 percent since November, well below the RBI's 5 percent target for March and medium-term target of 4 percent.

END OF LOOSENING CYCLE

Still, the RBI last week shocked investors by holding the repo rate at 6.25 percent and shifting its monetary policy stance to "neutral" from "accommodative".

The shift comes as Asia's third-largest economy is still limping back to health after Prime Minister Narendra Modi's Nov. 8 decision to outlaw old 500- and 1,000- rupee banknotes wiped out 86 percent of the currency in circulation overnight.

Industrial production fell 0.4 percent, year on year, in December, government data showed last week.

Even as the economic fallout of demonetisation remains unclear, the RBI is worried about a pick-up in global crude prices along with exchange rate volatility, which it says could push headline inflation above its medium-term target.

Global crude oil prices are up nearly 14 percent since end-November. The Indian rupee is expected to weaken by nearly 4 percent from its current levels to 69.50 a dollar in 12 months.

Most economists now expect the RBI to hold rates until at least the second half of next year.

"We continue to believe that the RBI will have to tighten

policy sooner than most are anticipating," Capital Economics said in a flash note.

(Reporting by Rajesh Kumar Singh; Editing by Andrew Roche)