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India’s Falling Prices Offer Little Comfort to Inflation Hawks

Wednesday, 14 Nov 2012 | 5:05 AM ET

The surprising fall in India's inflation rate in October may have added some cheer in the face of gloomy economic data, but market watchers warn that underlying price pressure remains strong, which could mean an upward revision to the rate in the coming months.

The Wholesale Price Index (WPI) - the country's main inflation gauge - rose 7.45 percent last month, down from 7.81 percent in September and below the near 8 percent consensus forecast, as food price inflation slowed.

"There's a lot of pent up inflation in the economy. The slowdown in India has been led by the supply side, capacity is still tight so this will keep underlying inflation pressure firm," Leif Eskesen, Chief Economist, India and ASEAN at HSBC told CNBC.

In addition, the support provided by a stronger rupee, which helps to reduce the price of imports will likely be short lived, said Siddhartha Sanyal, Chief India economist at Barclays. The currency has fallen 2 percent against the greenback in the last two weeks, which will impact components such as base metals, chemicals and edible oil prices, he said.

The recent fuel price hike, announced by the government to reduce its budget deficit, will also add to inflation, analysts noted.

As such, investors should not assume the data will be sufficient to change the Reserve Bank of India's reluctance to cut rates.

"They need clear evidence that inflation risks are subsiding, one observation is not enough. Also, they need more concrete measures from the government towards fiscal consolidation, rather than just a commitment to do so," Eskesen added.

Deputy Governor of the Reserve Bank of India (RBI), Subir Gokarn, told CNBC last month that the central bank will resist pressure to ease until the upward trend in inflation reverses sustainably.

(Read more: Why India's Central Bank Resisted Pressure to Ease)

"The Indian central bank remains in a difficult spot. While October's inflation print will be a welcome sign, it may not be a game-changer for the RBI's policy guidance," said Sanyal. Barclays forecasts interest rate cuts of 100 basis points during the first half of next year.

Robert Prior Wandesforde, head of India & South East Asia economics at Credit Suisse, believes the October inflation figure will likely be revised higher in the coming months, following a similar adjustment of the WPI reading from 7.6 to 8 percent back in August.

"Before we crack open the champagne….There was the usual upward revision to the WPI rate of two months ago, with a similar revision to today's number likely in a couple of months," Robert Prior Wandesforde, head of India & South East Asia economics at Credit Suisse, wrote.

By CNBC's Ansuya Harjani