Chances of rate cut rise as inflation picks up

New Delhi India's headline inflation picked up for the first time in five months in February on higher food costs but another measure of price pressures cooled, sparking market speculation that the central bank may surprise with an interest rate cut Thursday.

The wholesale price index, India's main gauge of inflation, edged up a faster-than-expected 6.95 per cent from a year earlier in February after a spike in vegetable prices fanned food inflation. Wholesale prices had risen an annual 6.55 per cent in January, the slowest in 26 months.

But non-food manufactured inflation, which the central bank uses to gauge demand-driven price pressures, slowed to a 14-month low of 5.8 per cent from 6.7 per cent in January.

"The key trend that needs to get captured is on core inflation...and that is something that should go as a positive for monetary policy," said Shubhada Rao, chief economist at Yes Bank in Mumbai.

"We still believe the RBI could look at a repo rate cut of 25 basis points tomorrow."

Weakening economic momentum as well as a softer policy stance adopted by central banks in the region is piling pressure on central bank Governor Duvvuri Subbarao to start cutting rates sooner than later.

Federal bond yields and swap rates eased on hopes of a surprise interest rate cut yesterday, when the Reserve Bank of India (RBI) reviews its policy.

"The market is building an increased chance of rate cut in March now than before as the manufacturing inflation print was benign," said Kumar Rachapudi, fixed-income strategist at Barclays Capital in Singapore.