S&P lifts India outlook; inflation, rates in focus

RELATED NEWS Fuel inflation accelerates, food inflation eases Inflation to come down in next 2 months: Ahluwalia

Food inflation eases, fuel accelarates

Steepening inflation has spurred markets to price in a 25 to 50 basis point interest rate hike in April. Bond yields were steady on Thursday as the latest data did little to change those expectations.

"It (WPI) should peak towards the middle of the year and come off a little bit towards the end of the year, but still be high," said Brian Jackson, an emerging market economist with the Royal Bank of Canada in Hong Kong.

"You're still getting some pressure from the fiscal side on total demand, and that sort of highlights that current policy rates are not appropriate given where we are."

Data released on Thursday showed the food price index rose 16.3% in the year to March 6, lower than an annual rise of 17.81% in the previous week.

It was the second straight weekly easing of food price inflation and analysts expect the trend to continue as the winter-sown harvest reaches the market.

The fuel price index rose 12.68% in the year to March 6, up from 11.38% in the previous week. The federal government had hiked state-set motor fuel prices at the end of February.

Policymakers have said headline inflation would ease over the next two months, after the finance minister said it could top 10 percent in March following a reading of 9.89% in February.

But in a sign the government was giving the green light to a rate hike, a top policy adviser said on Wednesday the Reserve Bank of India ought to carefully consider a return to a normal monetary policy.

The central bank has to balance managing the federal government's record USD 100 billion borrowing plan for the 2010-11 fiscal year with supporting growth and taming inflation.

Rising prices have sparked opposition-backed street protests and made India's government reluctant to push through reforms such as relaxing fuel price controls, even though the ruling Congress party faces no risk of losing power any time soon.