January inflation likely at more than 3-year low: Reuters poll

By Yati Himatsingka

BANGALORE (Reuters) - Inflation in India likely eased again in January to its lowest level in over three years due to a smaller rise in prices for manufactured goods, according to a Reuters poll.

Still, the headline rate will probably remain well above the Reserve Bank of India's perceived comfort zone of around 5 percent for a while, giving the central bank little room to ease monetary policy aggressively.

Wholesale prices rose 7.0 percent in January from a year earlier, the lowest rate since November 2009, and a tad slower than December's three-year low of 7.18 percent, according to a forecast of a Reuters poll of 31 economists taken over the past week.

Forecasts for the index, due on Thursday around 0630 GMT, ranged from 6.24 percent to 7.40 percent.

The RBI cut its key lending rate in January for the first time in nine months to support a slowing economy but said further easing would depend on both the gaping current account deficit and inflation moderating further.

"On a seasonal basis, January is a month where we see manufacturing prices rise, and it usually happens because in the run up to the budget manufacturers often pass on prices to consumers in anticipation in changes to taxes," said Yuvika Oberoi, economist at Yes Bank.

"In this time of the economic cycle, given how demand in the economy is, the ability to pass through prices is very limited."

Prices of manufactured goods, which has a 65 percent weighting in the headline rate, led the slowdown in the inflation rate in December.

The manufacturing Purchasing Managers' Index for January showed prices rose at a slower pace, suggesting the headline rate may have dipped last month.

However, food prices, which along with fuel make up about a third of the wholesale price index, likely remained high as the severe winter in the northern food producing states of the country cramped supply.

"There could be a little bit of a potential uptick in food inflation on the back of some of the weather related factors we have had more recently," said Leif Eskesen, HSBC's chief economist for India and Southeast Asia.

The main concern is onion prices, the staple ingredient in Indian cuisine, which have more than doubled in the last three months as supplies remained tight.

India's 1.2 billion inhabitants chomp their way through 15 million tonnes of onions a year, using them as the base for most traditional curries, and when prices rise it gives a significant kick to inflation.

While food prices have kept headline inflation high, core inflation - non-food items and manufacturing - extended its downward trend and dropped to 4.2 percent in December.

The government, which fixes the retail price of diesel, last month told retailers to raise the price of the subsidised fuel in small amounts every month, a move aimed at propping up public finances.

"We wont necessarily see much of the impact from the hike in diesel prices because it was relatively limited and also towards the middle of the month but there could be some slight uptick in energy related prices," Eskesen said.

India is the world's fourth biggest oil importer.

(Polling by Namrata Anchan; Additional reporting by Ashrith Doddi; Editing by Shri Navaratnam)