Inflation at 7 percent, hits eight-month high in October

By Manoj Kumar

NEW DELHI (Reuters) - India's wholesale price index rose to an eight-month high in October, driven by costlier fuel and manufactured goods, raising the prospect of a fresh rate hike despite the central bank governor's soothing words earlier on core retail inflation.

The wholesale price index (WPI), climbed 7.0 percent in October, compared with 6.46 percent in September, the Commerce and Industry Ministry said on Thursday.

A Reuters' poll of economists had predicted headline inflation at 6.90 percent higher than a year earlier.

Despite the quickening inflation pace, analysts said the Reserve Bank of India (RBI) may hold off on tightening monetary policy further after raising interest rates by a half-percentage point in two consecutive actions since September.

Rate hike concerns had eased after RBI Governor Raghuram Rajan said on Wednesday he was comforted by falling core consumer inflation despite "worryingly high" food prices, sparking a rally in bond prices.

STEADY BOND PRICES

Bond prices were steady after Thursday's data, but an upward revision in the August WPI numbers - to 6.99 percent from 6.1 percent - muddled the outlook for continued monetary tightening by the central bank.

The benchmark 10-year bond yield initially fell 3 basis points but soon recovered to trade at 8.95 percent, unchanged from the levels before the data. The yield closed at 8.92 percent on Wednesday.

"Looking at today's number and considering the higher revised August readings, the chances of immediate rate adjustments from RBI's end in the next policy meet can't be ruled out completely," said Shakti Satapathy, fixed income strategist at AK Capital in Mumbai.

India's core wholesale price index was estimated to have risen 2.6 percent in October from a year earlier, accelerating from an estimated 2.1 percent rise in September, according to a Reuters snap survey of three analysts and traders on Thursday.

Concerns remain that India is mired in a stagflationary environment of rising inflation but slowing growth, as most analysts say the economy is expanding even more slowly than the decade low of 5 percent in the fiscal year ended in March.

At the heart of India's inflationary pressures is a spike in food prices, which are seen threatening the re-election prospects of Prime Minister Manmohan Singh's Congress party ahead of national elections next year.

Retail prices of onions, used widely in Indian dishes, have quadrupled in some cities over the past three months, serving as a powerful reminder of the impact on consumers.

Thursday's data showed WPI food inflation rose 18.19 percent compared with 18.4 percent in September.

RELUCTANCE TO RAISE RATES?

Rising food prices had also been reflected by data on Tuesday showing consumer price inflation accelerated more than expected in October, to 10.09 percent from September's annual pace of 9.84 percent.

Still, RBI Governor Rajan sought to address concerns about inflation at Wednesday's news briefing, and analysts have interpreted the remarks as signalling reluctance to raise India's key lending rate - the repo rate - which currently stands at 7.75 percent.

Before Rajan's remarks on Wednesday, the rupee slumped to a two-month low over fears about the impact of an early end to Federal Reserve stimulus.

On Thursday, the rupee strengthened on comforting remarks by Rajan and by Fed chair-nominee Janet Yellen.

Analysts said that lingering worries about the end of Fed stimulus could also prevent the RBI from raising interest rates as that would further undermine growth prospects.

The central bank's next policy review is in mid-December.

(Additional reporting by Mumbai markets team; Editing by Rafael Nam and Richard Borsuk)