Retail inflation seen cooling, factory output contracting

Moderating food prices are likely to have slowed inflation in India during February, giving the RBI some relief after it raised interest rates three times since September to dampen price pressures, a Reuters poll showed.

Industrial ouput, however, was seen falling 0.6 per cent in January, according to the poll's consensus forecast, due to weak consumer demand and investment. The government will release the data on Wednesday.

Output fell by 0.6 per cent in December also, and if the forecast for January is correct, it would mark four months of falls and the longest phase of contraction that Indian factories have suffered in more than five years.

Last year's economic growth of 4.79 per cent was India's worst performance in a decade, and opinion polls show voters are likely to abandon the ruling Congress Party at a general election next month.

Whereas Indian voters are very sensitive to price rises, the likely slower inflation last month is probably too little, too late for the Congress-led coalition.

The poll forecast annual retail price inflation likely eased to 8.35 per cent in February, the slowest in two years, after standing at 8.79 percent in January.

Core retail price inflation in January had remained sticky at around 8 per cent, a level deemed uncomfortably high by Reserve Bank of India Governor Raghuram Rajan. Retail price index data is also due to be released on Wednesday.

The poll also forecast the wholesale price index likely eased to 4.99 per cent last month, the lowest since May 2013, and down from 5.05 per cent in January. The WPI data is due to be be released on Friday.

"Food inflation took longer to dissipate. Initially it was on the higher side, but now those price affects have actually come off," said Vishnu Varathan, an economist at Mizuho Corporate Bank in Singapore.

The reduced inflation will remove some pressure from the Reserve Bank of India for further action on monetary policy. The International Monetary Fund has warned that the RBI might have to resort to more rate hikes if inflation remains stubborn.

"For now inflation is going to be quite co-operative," said Varathan.

The factory output data likely will make less pleasant reading for a central bank that has struggled to support weakening economic growth, while trying to dampen price pressures.

Analysts say both export and domestic demand remain weak, and industrialists have delayed making fresh investment before the election. Capital goods production - a barometer for investment - shrank 3 per cent in December and has contracted in seven of the previous nine months.