The second straight month of deceleration in inflation as measured by the wholesale price index also gives a breather to the Reserve Bank, which has been trying to tame rising prices.
WPI inflation was at 6.16 per cent in December compared with 7.52 per cent in November.
January's inflation rate is the slowest since May 2013, when wholesale prices increased 4.58 per cent.
Inflation in food articles in January came down to 8.8 per cent as against 13.68 per cent in the preceding month, according to data released today.
"Food inflation remains elevated in spite of the overall favourable monsoon and agricultural production scenario, highlighting the demand-supply gaps and issues related to the supply chain," ICRA Senior Economist Aditi Nayar said.
As per the WPI data, prices of vegetables rose 16.6 per cent in January compared with a 57.33 per cent increase in December.
Onion prices climbed 6.59 per cent compared with a 39.56 per cent increase in December. Potato prices climbed 21.73 per cent in January.
Fruits were cheaper, as were protein-rich items such as eggs, meat and fish. However, inflation in milk inched up slightly to 7.22 per cent in January.
Data released this week showed retail inflation declined to a two-year low of 8.79 per cent in January, while industrial output in December shrank 0.6 per cent, prompting calls by industry for an interest rate cut to boost growth.
"We must and very urgently concentrate on reviving growth for the manufacturing sector and lay special emphasis on resolving problems of the MSME sector also," Ficci President Sidharth Birla said.
According to the WPI data, inflation in primary articles and in the fuel and power segment was at 6.84 per cent and 10.03 per cent, respectively.
Inflation in manufactured products such as sugar and edible oils was up marginally at 2.76 per cent on a monthly basis.
The Reserve Bank had increased a key interest rate by 0.25 per cent to 8 per cent in its Third Quarter Review of Monetary Policy on January 28. The central bank factors both retail and wholesale price based inflation data in its monetary policy.
"In the absence of an upside surprise in the inflation trajectory or in inflation expectations, it is likely to hold policy rates steady in the coming months," Barclays said in a research note.
There have been demands from various quarters that the RBI should look at relaxing interest rates as inflation has showed signs of easing while the slowdown in industrial output has persisted.
A Finance Ministry document said high inflation poses a big threat to growth as it would impair the ability of the Reserve Bank to cut interest rates to boost economic activities.
"The outlook on growth is...threatened by certain downside risks; the biggest of them being the high rate of inflation, which further dents the ability of the RBI to extend monetary policy support to growth revival," it said.
Economic growth fell to a decade-low of 4.5 per cent in 2012-13 fiscal and is estimated at 4.9 per cent in current financial year.
Assocham said an easy interest rate policy would not only create additional demand at the consumer level, it would also substantially lower the cost of borrowing for industry.
"We expect this trend to continue in the coming months, giving more elbow room to the RBI for an accommodative interest rate policy," Assocham President Rana Kapoor said.
January WPI inflation: What experts say
A. PRASANNA, ECONOMIST, ICICI SECURITIES PRIMARY DEALERSHIP, MUMBAI:
"Core WPI creeping up and now touching 3 percent despite weak demand condition implies that there is not much slack left in the economy. The manufacturing and core WPI behaviour supports the message from CPI data that underlying price pressures in the economy are still strong relative to weak demand conditions. We don't expect a rate hike in April policy but further hikes cannot be ruled out given the strong price pressures."
SIDDHARTHA SANYAL, INDIA ECONOMIST, BARCLAYS, MUMBAI:
"The headline number both in case of WPI and CPI show a big fall driven by food prices. But the euphoria over the moderation in the headline number needs to be balanced by the core inflation number which has inched up. At the moment, (RBI) governor Rajan has given enough indication of staying on hold. I don't expect Rajan to raise rates in April as inflation is easing and core inflation is not very high."
SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI:
"We expect the core WPI to inch up on increased wage cost and higher primary article prices even as the headline and the non-core will inch lower. We maintain our call for WPI to move to 3-4 percent while CPI will move to 6-7 percent over the next 9-12 months. However, we do not expect the RBI to cut rates."
RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI:
"As expected, WPI based inflation has eased on the back of easing of food articles inflation, but the manufactured product prices inflation still reflects that some pricing power is left with manufacturing companies because of rupee depreciation and rise in input prices. It's too early to draw comfort from this number.
"The RBI will adopt a wait-and-watch approach as of now because going by just one set of data is not enough and the next set of data on inflation and industrial production will be critical to establish a trend."
ANUBHUTI SAHAY, ECONOMIST, STANDARD CHARTERED BANK, MUMBAI:
"With both headline CPI and WPI printing much better than expected, we maintain our view of a status quo on repo rate in the April policy meeting. However, the uptick in core WPI to 3 percent - the first time after April 2013 - keeps us wary.
Most of the positive surprise in today's inflation print is on the back of lower vegetable prices (22 percent month-on-month correction). Thus a reversal in these prices especially during summer months can push headline inflation higher."
SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI:
"As evident, the easing of inflation resulted from a considerable fall in key vegetable prices and tamed oil inflation in the near term. Looking at the core WPI in a marginal rising zone and considering the stickiness in the retail core CPI, the current rate cycle of the RBI would remain at an elevated pace with probability of a no rate hike in the coming policy meet.
"However, the central bank would take note of the core inflation trend for reining the over all inflation level to its medium term target."
- Data on Wednesday showed consumer inflation eased to 8.79 percent in January, its lowest level since January 2012, raising expectations the central bank would keep interest rates on hold.
- India's central bank unexpectedly raised its policy interest rate last month by 25 basis points to 8.00 percent, but said that if consumer price inflation eases as projected it does not foresee further near-term tightening.
The Reserve Bank of India holds its next policy review on April 1.
India Jan WPI inflation eases more than expected to 8-month low
(Reuters): India's wholesale price-based inflation eased to an eight-month low in January as food prices moderated, offering some relief to policymakers who have long battled to get a handle on surging prices.
The wholesale price index (WPI), long regarded as India's main inflation measure, rose 5.05 percent last month, data showed on Friday, compared with a 5.80 percent jump forecast by economists in a Reuters poll.
In December, wholesale prices rose 6.16 percent.
But in a worry for new Reserve Bank of India (RBI) chief Raghuram Rajan, core WPI inflation inched up to 3 percent last month, which analysts said was its highest level since April 2013.
"...the euphoria over the moderation in the headline number needs to be balanced by the core inflation number which has inched up," said Siddhartha Sanyal, India economist at Barclays.
"At the moment, Governor Rajan has given enough indication of staying on hold. I don't expect Rajan to raise rates in April as inflation is easing and core inflation is not very high."
However, federal bond prices fell after the data on worries that a pickup in core inflation could evoke a hawkish response from Rajan when he next reviews monetary policy in April.
The benchmark 10-year bond yield rose 2 basis points to 8.83 percent after the WPI data. The yield initially had fallen to as low as 8.79 percent.
Persistently high inflation prompted Rajan to raise interest rates last month, the third hike since September, even though economic growth has been stuck below 5 percent for the past four quarters.
Friday's data comes days after cooler food prices helped retail inflation ease to a two-year low of 8.79 percent in January. It will offer some relief to the ruling Congress party which is seeking a third straight term in upcoming national elections.
Opinion polls ahead of the elections - expected between April and May - predict major losses for the ruling party, in part for sagging economic activity and its failure to control inflation.
Runaway prices, particularly those of vegetables, were one of the principal reasons for the drubbing the Congress party received in recent state elections.
Food inflation slowed to 8.80 percent in January from 13.68 percent in December, as vegetable prices fell 21 percent month-on-month.
Rising prices amid the economic slowdown have pressured household budgets and company profits, hitting consumer demand as well as corporate investments. Industrial production shrank 0.6 percent on year in December, its third contraction in a row, dragged down by weak investment and consumer demand.
Last month, a panel set up by Rajan recommended the RBI pursue managing inflation as its main policy objective. It suggested setting a long-term retail inflation target of 4 percent, plus or minus 2 percent.
In the intermediate term, the panel proposed the goal would be to bring it down to 8 percent by January 2015 and 6 percent by January 2016.
India is among a handful of large emerging economies that does not target inflation.
Analysts say giving precedence to inflation management over the central bank's two other main objectives -- economic growth and financial stability -- will encourage households to save and help businesses plan investments.
While improved food supplies following a bumper harvest are expected to keep overall inflation in check, risks persist.
"Most of the positive surprise in today's inflation print is on the back of lower vegetable prices," said Anubhuti Sahay, an economist with Standard Chartered bank in Mumbai. "Thus a reversal in these prices especially during summer months can push headline inflation higher."
Purchasing managers indexes earlier this month pointed to underlying inflationary pressures as output prices grew at a faster pace last month while input cost pressures eased very slightly.
An upswing in global crude prices and a government plan to raise rural wages from April are also expected to push up costs for Indian firms.