Inflation likely reversed direction and edged up in December on higher food costs, a Reuters poll showed, but economists said declines in previous months will still give the central bank room to cut interest rates in support of growth.
Wholesale prices (WPI), India's main inflation gauge, rose an annual 7.40 percent in December, according to the median consensus from a Reuters poll of 28 economists, faster than the 7.24 percent seen in November.
Persistently high inflation has kept the Reserve Bank of India from lowering its key policy rate when other major central banks are easing, even though Asia's third largest economy is headed for the weakest full-year growth in a decade.
"We see inflation re-accelerating through December," said Vishnu Varathan, an economist at Mizuho Corporate Bank in Singapore.
"We sense that there will be price pressure built on the food front, which was already reflected in consumer prices in November."
Primary articles like food and fuel make up over a third of the wholesale price index, and their high cost has kept inflation stubbornly high.
Although the expected headline inflation rate is higher than in recent months, it is much lower than the near 10 percent average through 2010 and 2011, prompting analysts to call for the RBI to cut the repo rate cut early this year to boost a struggling economy.
"The inflation trajectory has come down significantly. The last two readings have been lower and we could see rate cuts in January," said Amol Agrawal, an economist at STCI PD.
Core inflation has softened and with expectations for further declines analysts said the central bank could deliver a rate cut as early as its next meeting on January 29.
Expectations for a cut in the repo rate in early 2013 from a current 8.0 percent hardened after the RBI shifted focus towards growth at its December meeting while leaving the policy rate unchanged.
With distribution and storage bottlenecks raising food costs, the case for further easing could be weakened by a pick-up in inflation this year.
"The real question is how much further can the RBI go with rate cuts if the situation continues to be exposed to outside risks to food and fuel inflation," said Varathan.
Consumer prices likely nudged up an annual 10.2 percent in December, according to a poll of eight economists, from 9.9 percent in November.