Inflation seen within RBI comfort level in May

By Yati Himatsingka

BANGALORE (Reuters) - India's headline inflation probably held near the Reserve Bank of India's comfort level of 5 percent last month, giving it room to ease policy, as commodity, food and fuel costs remained moderate, a Reuters poll found.

Wholesale prices, India's key inflation measure, probably rose an annual 4.87 percent in May, the slowest pace since November 2009, the poll of economists showed.

They rose 4.89 percent in April, the first time the index has been below 5 percent in over three years.

High inflation has been a constant roadblock for policymakers struggling to breathe life into Asia's third-largest economy, and a major factor in the declining popularity of Prime Minister Manmohan Singh's government.

"We don't expect it to rise primarily on account of global prices being soft in April and you would see some lagged impact in the inflation in May," said Abhishek Upadhyay, economist at Axis Bank in Mumbai.

In recent months inflation has cooled on moderating food and fuel costs, helped along by lower global commodities prices. Forecasts in the poll, conducted this week, ranged from 4.60 percent to 5.40 percent.

Both the manufacturing and services Purchasing Managers' Indexes (PMI) released last week also showed price pressures eased last month.

"As suggested by the monthly PMI readings, core inflation is likely to fall below 2.5 percent," said Rupa Rege Nitsure, chief economist at Bank of Baroda.

Core inflation, which the central bank monitors to gauge demand-driven price pressures, slowed to 2.8 percent in April from 3.5 percent the previous month on slowing global prices of iron ore and steel.

However, the RBI - which has already cut its lending rate three times this year - has said it will increasingly monitor prices at a retail level, partly because the wide gap has made the consumer price index difficult to ignore.

Retail inflation likely remained elevated in May, despite easing for the third straight month, after staying close to or above double-digits for over a year, according to a separate Reuters poll.

To add to inflation concerns, the recent fall in the Indian rupee to record lows has sparked worries about a rise in the price of imported goods such as crude oil. India is one of the largest importers of crude oil and gold.

"If you see the WPI basket, about 50 percent of it can be attributed to imported products. So if rupee depreciation sustains and global commodity prices don't come off ... there will be an impact on the coming domestic inflation prints," added Upadhyay at Axis Bank.

(Polling by Ruby Cherian, additional reporting by Ashrith Doddi; Editing by Kim Coghill)