Oil slump leads to biggest fall in years in India's wholesale prices

NEW DELHI (Reuters) - India's wholesale price index fell for the second time in three months in January as oil prices slumped, bolstering prospects for further interest rate cuts by the central bank.

The wholesale price index (WPI) unexpectedly fell 0.39 percent last month from the same period a year earlier, its biggest decline since June 2009, government data showed on Monday.

The fuel price index tumbled 10.69 percent on-year.

Analysts in a Reuters poll had predicted a 0.4 percent year-on-year gain in wholesale prices, slightly faster than a provisional 0.11 percent increase in December.

The reading for November WPI inflation was revised down to -0.17 percent from 0.0 percent earlier.

The data comes days after annual consumer inflation came in at 5.11 percent, well below the central bank's medium-term target of 6 percent, and the trade deficit shrunk to a 11-month low.

While the Reserve Bank of India (RBI) mainly focuses on consumer inflation to set its lending rates, analysts say improving trade gap and falling wholesale prices will help moderate retail inflation in the months ahead by providing stability to the rupee and easing input costs for firms.

The central bank is widely expected to resume its monetary easing after Finance Minister Arun Jaitley presents his annual budget on Feb. 28.

It kept its policy repo rate unchanged at 7.75 percent early this month after surprising investors in January with the first interest rate cut in 20 months.

"WPI inflation continues to be held down by lower commodity prices and a stable rupee," said A. Prasanna, economist, ICICI Securities Primary Dealership Ltd in Mumbai.

"We continue to expect (a) 25 basis point repo rate cut in the April policy."

A collapse in global oil prices has unleashed a wave of monetary easing around the world as central bankers seek to stave off deflation and bolster their economies.

Finance officials from the Group of G20 leading economies sketched an uncertain outlook for global growth last week and vowed to use monetary and fiscal policy if needed to stem any risk of stagnation.

But in India, where food supply shortages often result in price shocks, policymakers fear poor harvest due to weak rains as well as a rebound in oil prices could again flare up inflation.

In a sign of worry for the RBI, wholesale food inflation accelerated to a six-month high of 8.00 percent from 5.20 percent in December.

(Reporting by Rajesh Kumar Singh; Editing by Kim Coghill)