January inflation seen easing on food, fuel prices but still elevated

India's high inflation probably eased to a seven-month low last month as food and fuel prices showed signs of moderating, providing some respite to the Reserve Bank of India which has been hiking interest rates to curb soaring prices, Reuters polls showed on Tuesday.

Ominously, though, factory activity likely contracted 1.0 per cent in December due to sluggish mining activity and weak consumer demand.

If confirmed, such a figure would signal the third straight month of contraction and the longest streak of shrinking manufacturing activity in Asia's third-largest economy since December 2008.

Reuters surveys conducted from February 4-10 showed inflation, as measured by the wholesale price index, likely eased to 5.80 per cent last month, while retail price growth slipped to 9.40 per cent - the slowest since May.

In December, wholesale prices rose 6.16 per cent annually while consumer prices climbed 9.87 per cent.

That should be welcome news for the Reserve Bank of India (RBI), since its recent rate hikes have come against the backdrop of weak economic growth and stalled investment under the corruption-scandal battered Congress party government of Manmohan Singh, which faces an uphill battle in elections due by May.

"The central bank should draw comfort from the gradual deceleration in inflation," said Radhika Rao, an economist at DBS in Singapore.

"But until consumer inflation makes a decisive turn south, the central bank is likely to maintain a tight policy stance, even at the expense of short-term growth."

The RBI has hiked its benchmark interest rate three times since September in a bid to tame stubbornly high inflation.

In addition to a surprise rate rise last month, it has effectively begun to target inflation based on consumer prices, a dramatic shift in approach for a central bank that has struggled to manage the balance between growth and inflation.

In doing so, it cited a "glide path" towards lowering the CPI below 8 per cent by next January and 6 per cent a year later -- targets that were laid out in sweeping proposals to revamp the way monetary policy is conducted in India.

Food prices continue to rise, however, as the country's poor infrastructure means produce takes longer to reach markets, with large amounts spoiling on the way.

But with a good harvest bringing down vegetable prices, economists said inflation could be headed lower.