New WPI series pegs inflation at 8.5 pct

The wholesale price index rose 8.5 per cent in August compared with 9.8 per cent in July.

The annual headline inflation eased in August but remained well above the comfort zone of a RBI that is still expected by many economists to raise interest rates at its policy review on Thursday.

Inflation remains stubbornly high and the Reserve Bank of India RBI has cautioned that capacity constraints in the rapidly expanding economy will keep up pressure on prices.

The wholesale price index WPI rose 8.5 per cent in August compared with 9.8 per cent in July. The figures are the first using a new series of data with a different base year of 2004-05,new components and weightings.

Under the old series,August inflation eased slightly to 9.5 per cent compared with a median forecast for 9.6 per cent in a Reuters poll. July8217;s reading,based on the old series using 1993-94 as base year,was 9.97 per cent.

8220;With industrial production data last week showing solid conditions in the manufacturing sector,today8217;s confirmation that inflation remains uncomfortably high suggests that the RBI is likely to hike rates again when it meets on Thursday,8221; said Brian Jackson,senior emerging markets strategist at Royal Bank of Canada in Hong Kong.

Not everyone expects a rate increase on Thursday.

8220;Pretty clear deceleration in inflation on the new headline measure. We were already looking for steady hand from RBI on Thursday so this report reinforces our view,8221; said Sean Callow,senior currency strategist at Westpac Institutional Bank in Sydney.

The one-year swap rate fell three basis points to 6.19 per cent after the data,while the benchmark 10-year government bond eased 2 basis points to 7.95 per cent as the downward trend in inflation spurred hopes of a less hawkish policy stance by the central bank.

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Trade Minister Anand Sharma said on Tuesday that headline inflation would slow down with the introduction of a new base year for the series,

While some recent indicators had pointed to possible cooling growth in Asia8217;s third-largest economy,Friday8217;s July industrial output data was surprisingly strong,boosting the chances of a 25 basis point rate increase on Thursday.