Retail inflation likely rose in Jan on govt's move to change base year

Retail (or CPI-based) inflation probably rose in January as the country shifted to a new base year for calculating prices, adding more weight for services like education and health, changes that may deter the Reserve Bank of India from cutting key policy rates soon.

A slump 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.

But in the domestic economy, where food accounts for nearly half of the consumer price index, policy makers fear that retail inflation could accelerate if oil prices rebound or weak rains hurt food production.

Revisions to the way the country calculates its gross domestic product have raised reported growth rates but reduced the size of the economy, creating uncertainty over the outlook for economic and monetary policy.

The RBI held interest rates last week at 7.75 per cent after easing policy three weeks ago, leaving its next move until after Finance Minister Arun Jaitley presents his annual budget on Feb. 28.

According to the consensus forecast in a Reuters poll of analysts, annual retail price inflation accelerated to 5.4 per cent in January, mainly driven by a rise in vegetable prices, from 5.0 per cent in December.

Analysts also forecast industrial output grew 1.6 per cent in December, slower than November's 3.8 per cent.

Retail inflation data for January and industrial output data for December are due on Thursday around 5:30 pm.

Officials said inflation data would reflect a lower weighting for food items like cereals, as the Ministry of Statistics shifts the base year for its index series to 2011/12 from 2004/05.

The new numbers will also more realistically reflect consumption patterns, including higher weights for education and health, said Pronab Sen, a former chief statistician of India.

Currently, education and health contribute 3.35 per cent and 5.69 per cent to the CPI index, respectively.

The government this week sharply raised its growth estimates, forecasting the economy would expand by 7.4 per cent in the current financial year ending March 31, 2015. The central bank had previously forecast growth at 5.5 per cent.

"With the new GDP series revealing a stronger-than-expected recovery, the likelihood of a repo rate cut prior to the April 2015 policy meeting has diminished," said Aditi Nayar, an economist at ICRA, the Indian arm of rating agency Moody's .

"Rate cuts are unlikely to exceed 50 bps over the next few quarters," she added.

Jaitley is expected to push tax reforms in his Budget to boost investments, while supporting the RBI's effort of bringing inflation to below 6 per cent by the start of 2016.

(Reuters)