* WPI rises 6.87 pct in July, much lower than expected
* Food, fuel inflation down, but core inflation up
* Inflation not in the comfort zone, govt adviser says
* Drop seen temporary, inflation will rise again - analysts
* Economists doubt inflation will prompt rate cut in Sept
By Manoj Kumar
NEW DELHI, Aug 14 (Reuters) - India's wholesale inflation
unexpectedly fell in July to a near three-year low but
economists doubt the drop will be enough to persuade the central
bank to cut interest rates at its September meeting to try to
revive the struggling economy.
Inflation dropped to 6.87 percent in July from 7.25 percent
in June as domestic gasoline and vegetable prices fell in July.
But global oil prices have been rising since then and drought in
some parts of India is threatening fresh inflationary pressures.
In addition, core inflation, which excludes food and fuel
prices, rose in July to 5.44 percent from 4.9 percent in June,
These factors will push inflation higher again and make the
Reserve Bank of India (RBI) cautious about relaxing its hawkish
stance anytime soon, in contrast with central banks elsewhere
that are seen easing policy to counter the global economic
slowdown, they said.
"There are several risks for the RBI to lose sleep over,"
said Rajeev Malik, senior economist at CLSA in Singapore. "I
think the RBI stays on hold on rates for the remainder of the
India's 10-year government bond yield dropped
8 basis points to 8.15 percent after the data, while India's
main stock index swung higher after the surprise data. One-year
and five-year swaps rates dropped.
Inflation had stayed above 7 percent for two-and-half-years,
restraining the central bank from easing monetary policy too
aggressively even as the economy slid in the January-March
quarter to its weakest pace of annual growth in almost a decade.
It cut its policy rate by 50 basis points in April but has
left it on hold at 8.00 percent since. At its last review on
July 31, the RBI said cutting rates would "aggravate
inflationary impulses without necessarily stimulating growth."
Central Bank Governor Duvvuri Subbarao said then that the
rising momentum in core inflation was "disturbing" and he
maintained a hawkish tone on Monday, saying inflation was too
"This data cannot be taken as evidence that inflation is
coming down," said A Prasanna, an economist at ICICI Primary
Dealership Ltd in Mumbai.
"We still think it will be premature for the Reserve Bank of
India to cut rates."
July's inflation was the lowest since November 2009.
Analysts had expected the wholesale price index (WPI)
-- India's benchmark inflation gauge -- to rise in
July by 7.37 percent from a year earlier. Only two of 24
respondents in a Reuters poll published on August 8 had expected
a reading below 7 percent.
"It is not yet at the level where one can say it has entered
the comfort zone," Montek Singh Ahluwalia, deputy chairman of
India's planning commission, said of the data.
The pull back came after petrol and vegetable prices fell by
nearly 4 percent and 6 percent respectively in July from June.
That pushed annual fuel inflation down dramatically to 5.98
percent in July, its lowest level since December 2009, from
10.27 percent in June. Food inflation eased to just over 10
percent from 10.8 percent.
However, manufacturing inflation rose to 5.58 percent in
July from 5.00 percent in June, a major factor driving up core
DROUGHT, OIL AND A WEAK RUPEE
Economists said the fall in inflation would be temporary and
they expected it to flare up again.
A weak monsoon, which has left India facing drought in some
regions, is adding to the inflation threats already present from
a weak rupee, which hit a record low in June.
A widespread drought in 2009 forced India to import sugar,
pushing global prices to 30-year highs.
Global benchmark Brent crude futures, which fell
during most of the March-June quarter, have risen about 25
percent since late June to trade at $114 a barrel.
Sujan Hajra, chief economist of Anand Rathi Securities in
Mumbai, said the pipeline price pressures will push inflation
back up to 8.5 percent by December.
Shubhada Rao, chief economist at Yes Bank in Mumbai,
forecast an inflation rate as high as 8 percent by March 2013.
The central bank has predicted inflation of 7 percent by that
India's interest rates are among the highest among major
emerging economies but the rapid descent in growth has prompted
calls for the central bank to cut them at its next policy
meeting on Sept. 17.
The central bank has been trying to apply pressure to the
government to do more to help revive economic growth, which fell
to just 5.3 percent in the January-March quarter from a year
earlier, the weakest pace in nine years.
Palaniappan Chidambaram, who took up his third stint as
finance minister on July 31, has promised to respond by
unplugging supply bottlenecks which contribute to inflationary
pressures and arresting a fiscal deficit that puts upward
pressure on interest rates.
A failure to check the fiscal deficit, seen reaching 6
percent of GDP in the year to March 2013 and which has prompted
two ratings agencies to threaten to downgrade India's credit
status to junk, would make it tougher to convince the central
bank to try to bolster growth with a rate cut.