India's wholesale inflation cooled to its weakest pace in 10 months in November, a sign the economy may finally be escaping a long period of price pressure and raising the chances of a rate cut in January.
The wholesale price index (WPI), India's main inflation gauge, rose 7.24 percent from a year earlier, below expectations for a rise of 7.6 percent and below October's 7.45 percent. An easing in annual fuel and manufacturing inflation helped rein in price pressures.
The Reserve Bank of India (RBI) holds its next policy meeting on Tuesday but has said a rate cut is "highly improbable." The tilt toward a period of softer inflation though is raising expectations the central bank might cut its 8 percent repo rate in January.
"The probability of a rate reduction in the month of January has now gone up," said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
November was the second straight month that prices rose less than economists had forecast, which Robert Prior-Wandesforde, economist with Credit Suisse in Singapore described as a "pleasant surprise".
"I think maybe this is the first sign we're getting another downward leg in inflation," said Prior-Wandesforde, who forecasts inflation will drop below 6 percent in 2013, possibly leading to a series of rate cuts.
India's 1-year overnight index swap fell around 3 basis points after Friday's data.
Cooling prices are welcome news for Prime Minister Manmohan Singh, a veteran economist who has launched a raft of reforms since September aimed at reviving both the economy and his government's flagging fortunes ahead of a general election.
"Our expectation is it will trend downwards over the next 2-3 months," Singh's finance minister, P. Chidambaram, said.
The inflation data comes after a spike in industrial output in October and data indicating that infrastructure output and investment are picking up, raising hopes a slide in India's economic growth is coming to an end.
On Thursday, the government approved a new body to streamline infrastructure projects, and bills aimed at attracting more foreign cash into the banking, pension and insurance industries may be passed next week.
"I am confident that the steps we have taken - and some more steps that we will take in the next few weeks- will help turn the Indian economy around," Chidambaram said.
"There is no reason at all to become complacent," he said.
Recent government policies to attract investment from foreign supermarkets and to tackle budget-busting fuel subsidies pleased domestic markets, but economists say more needs to be done to control India's fiscal deficit, which is the biggest among major emerging economies as a proportion of GDP.
However, the economy is still headed for the weakest full-year growth in a decade, at about 6 percent, far below the near double-digit pace before the global financial crisis.
The RBI has not lowered interest rates since April because inflation remained near 7 percent, exacerbated by a weak rupee that has added to the cost of fuel imports.
November's core inflation, which excludes food and fuel prices, also came in below expectations, thanks to lower prices for manufactured products and a sign of softer demand during religious festivals such as Diwali in November.
Although some economists said they now saw no reason for the RBI not to lower rates on Tuesday, a spate of upward revisions to previous months' inflation data may lead the central bank to err on the side of caution and wait for a clearer down trend to emerge.
September inflation was revised up to 8.07 percent from 7.81 percent reported earlier, Friday's data showed.
Rating agency Standard & Poor's warned again on Tuesday that India's credit rating faces a one-in-three chance of being downgraded to junk over the next two years because of a heavy debt burden and pressure on the fiscal deficit, which is seen overshooting a target of 5.3 percent in the fiscal year ending in March.
However, the government is still committed to the target.
"5.3 percent is the fiscal deficit target for this year. 5.3 percent it shall be," said Arvind Mayaram, the economic affairs secretary.