India inflation rises, dampens rate cut hopes

NEW DELHI: Indian inflation accelerated to its highest level this year, hitting 7.81 percent in September, data showed on Monday, outpacing market forecasts and reducing the chances of an interest rate cut.

The country's hawkish central bank will meet at the end of the month to consider its interest rate policy as it faces calls from businesses to cut rates to spur economic growth that has slowed dramatically.

The Wholesale Price Index - India's most widely watched inflation measure - rose 7.81 percent year on year last month - just exceeding market forecasts of 7.7 percent.

The reading was up from 7.55 percent the previous month and 6.87 percent in July, which was close to a three-year low.

Developing countries such as China, South Korea and Brazil have lowered borrowing costs in a bid to protect their economies from the effects of the Eurozone debt crunch.

But India's central bank still is targeting inflation, which remains stubbornly above its "comfort" level of five percent.

September's inflation rise comes after the government recently hiked state-controlled diesel prices by some 14 percent in an effort to lower massive fuel subsidies that have contributed a bloated fiscal deficit.

The price hike was hailed by some as a sign of readiness by the government to tackle tough economic reforms and the widening hole in the public accounts.

But critics said it would spur inflation at a time when growth has slowed sharply to around 5.5 percent from near double-digits in recent years.

Most analysts predict the central bank will keep lending rates on hold until inflation shows a decisive downward move. The bank last cut rates in April after raising borrowing costs 13 times.

The central bank will "approach easing with caution, keeping a keen eye on inflation and further policy progress out of Delhi", said Leif Eskesen, HSBC chief India economist.

The higher inflation comes as the Congress-led government of Premier Manmohan Singh is hoping the economy will pick up as a result of a string of market-opening steps in the past weeks that ended years of policy paralysis.