Retail inflation accelerates in Jan, but stays below RBI's target

By Rajesh Kumar Singh and Manoj Kumar

NEW DELHI (Reuters) - India's retail inflation accelerated in January after shifting to a new base year for calculating prices, but stayed well below the Reserve Bank of India's (RBI) target, bolstering prospects for further interest rate cuts.

Consumer prices rose an annual 5.11 percent compared with a 4.28 percent gain in December, the statistics department said on Thursday after it changed the base year for measuring inflation to 2012 from 2010.

Under the old series, inflation was reported at 5 percent in December.

The revamped index carries a higher weight for education and health services, but has a lower weight for food and fuel items, which authorities say better reflects changing consumption patterns.

The RBI aims to keep inflation at or below 6 percent in the period to January 2016 and is widely expected to resume its monetary easing after Finance Minister Arun Jaitley presents his annual budget on Feb. 28.

"The headline number has surprised on the downside," said Jyotinder Kaur, principal economist at HDFC Bank. "All this data is re-assuring, as we were of the opinion that space exists for more monetary easing."

The central bank 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.

Thursday's data comes days after revisions to the way New Delhi calculates gross domestic product (GDP) have dramatically lifted reported growth rates, making India officially the fastest growing major economy in the world.

With the economy suddenly appearing to be motoring again, the RBI may have to think twice about the risk of stoking inflation before deciding to lower interest rates again.

Adding to the conundrum, annual industrial output growth slowed to 1.7 percent in December from 3.9 percent a month before, separate government data showed on Thursday.

"Today's data point to increasing slack in the economy," said Shilan Shah, India Economist at Capital Economics.

"As such, while the revised GDP data suggest that the economy is growing much faster than previously thought, the case for further policy loosening remains intact."

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 earlier this week and vowed to use monetary and fiscal policy if needed to stem any risk of stagnation.

(Writing by Rajesh Kumar Singh; Editing by Douglas Busvine and Ralph Boulton)