India July inflation near three-year low

India's inflation rate hit a near three-year low in July, data showed Tuesday, but analysts said the drop may not be enough to prompt the hawkish central bank to cut interest rates.

The 6.87 percent annual inflation reading in July was down from June's 7.25 percent level and significantly undershot market forecasts as food and fuel prices eased.

"The inflation reading was a positive surprise but it is premature to claim the inflation beast has been tamed. It may be more accurate to say it has been slightly sedated -- but only temporarily," said HSBC economist Leif Eskesen.

While the headline inflation figure had fallen, core inflation -- which strips out price-volatile food items -- rose quite sharply to 5.4 percent from 4.9 percent in June, economists said.

Weak monsoon rains could push food prices back up, they also warned.

"Inflation pressures will continue to remain elevated in the near-term, reducing space for further policy rate cuts," said Goldman Sachs economist Tushar Poddar.

India's Congress-led government, which has its eyes on the 2014 general elections, and business groups have been pressing hard for the central bank to cut interest rates to spur the country's sharply slowing economy.

The economy grew by just 5.3 percent between January and March -- its slowest annual quarterly expansion in nine years.

Many analysts forecast full-year growth of five to six percent, far below the near double-digit expansion the economy notched up during much of the last decade.

While that projected growth remains enviable by Western standards it is too slow to fulfil government pledges of significant poverty reduction in the country of 1.2 billion.

But the central bank, which targets inflation of around five percent, has been more worried by rising prices than slumping expansion, unlike its global counterparts which have been easing rates.

"The year-on-year headline inflation figure is quite comforting," Dariusz Kowalczyk, senior economist at Credit Agricole, told AFP.

"But what clearly will not be comforting to the central bank is the breakdown of figures which underline that price pressures are still there."

The timing of the next rate cut may depend on whether new finance minister P. Chidambaram starts to push through key economic reforms.

The bank has been insisting the government contain a ballooning fiscal deficit and take "policy actions to encourage investment" which would include removing constraints on foreign direct investment.

"As far as the timing of rate easing, my sense we need is we need action from the government," Yes Bank chief economist Shubhada Rao told AFP.

Source: http://news.yahoo.com/india-july-inflation-falls-unexpectedly-6-87-071920056--finance.html

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