NEW DELHI (Reuters) - India's wholesale price-based inflation eased to a nine-month low in February as food and fuel prices moderated, raising expectations that the central bank would leave interest rates unchanged at its policy review next month.
The wholesale price index (WPI), long regarded as India's main inflation measure, rose a slower-than-expected 4.68 percent last month from a year earlier.
A 10 percent drop in wholesale vegetable prices from January helped overall inflation ease for the third straight month.
Friday's data comes on the heels of a faster-than-expected slowdown in consumer inflation, which eased for a third straight month to a 25-month low of 8.10 percent in February.
It is also the last major economic data before the Reserve Bank of India's (RBI) policy review on April 1 and national elections that begin on April 7.
"For policy, CPI is more relevant and based on latest CPI reading, we expect RBI to keep rates steady in the April policy review," said A. Prasanna, an economist at ICICI Securities Primary Dealership Ltd in Mumbai.
In its bid to tamp down inflation, the RBI has raised interest rates three times since September, even as the country's economic growth sputtered.
While cooling prices have raised the odds that rates will be left on hold for now, some analysts say the reading on core inflation could determine the eventual outcome of the upcoming monetary policy review.
Core WPI inflation, which strips out volatile food and fuel prices, accelerated to 3.15 percent from 3 percent in January.
Elevated core inflation prompted new RBI chief Raghuram Rajan to deliver a surprise rate hike of 25 basis points in January.
That concern pushed up the benchmark 10-year bond yield by 3 basis points to 8.77 percent on Friday.
"Even with tepid growth and falling inflation, the RBI is unlikely to lose its focus on managing inflation expectations," analysts at Barclays wrote in a note after the data.
"Of late, Governor Raghuram Rajan had indicated that interest rates are appropriate now, but CPI inflation and inflation expectations will need to be lowered over time in order to generate sustainable growth."
A central bank panel advised Rajan in January to pursue managing consumer inflation as the RBI's main policy objective. It also suggested moving to a retail inflation target of 4 percent in three years, with a 2 percent band on either side.
That stoked market fears it may start aggressively tightening policy soon if price pressures did not sharply abate.
Rajan says price stability is a necessary condition to promote economic growth and has rejected views of a trade-off between the two.
This has prompted analysts at Credit Suisse to predict three more rate increases of 25 basis points each, beginning in the September quarter this year.
"This may sound hawkish but if the governor is truly committed to crushing inflation expectations much higher rates are likely to be required in time," said Robert Prior-Wandesforde, director of Asian economics research at the financial services company.
To what extent this forecast materialises would depend on the support Rajan receives in his inflation fight from a new government after the elections in April and May.
Finance Minister P. Chidambaram, has already cautioned against inflation targeting, advising the central bank to give equal focus to price stability and growth.
The outlook on food prices could keep both the RBI and the government on their toes.
Hail and heavy rains in the past two weeks have damaged crops, which may push up food prices again.
An uncertain outlook for this summer's monsoon rains due to the El Nino weather pattern is also worrying policymakers.
Any flare-up in food prices will not be a good news for the ruling Congress party.
It is seeking a third term in the national elections but is trailing in most opinion polls and is widely expected to be defeated, in part due to its failure to control inflation and arrest the country's economic slowdown.
Reporting by Rajesh Kumar Singh; Editing by Kim Coghill