Rising prices for some food products and firm demand during the festival season pushed up India's retail inflation to a four-month high in October, making it less likely the central bank will cut interest rates at its policy review next month.
Retail inflation in India has slowed sharply, but a surge in prices of items like lentils threatens the popularity of Prime Minister Narendra Modi, whose party lost elections in India's third-most populous state on Sunday.
Higher demand for consumer durables and food items during the festival season beginning in October also contributed.
India's annual consumer price inflation edged up to 5.0 percent in October, up for the third straight month, compared with 4.41 percent a month ago, government data showed on Thursday.
Industrial production grew at a slower than expected pace of 3.6 percent in September, dampened by a slower expansion in the mining sector, data showed.
Analysts said inflation may moderate once festival demand softens and prices of lentils and vegetables fall as imports increase. Retail food inflation in October came in at 5.25 percent, higher than 3.88 percent recorded in September.
"The uptick in inflation related to the festive demand, if any, will dissipate over the next month," said Aditi Nayar, an economist at ICRA, the Indian arm of Rating Agency Moody's.
Food items, which accounts for almost half the CPI basket, have increased in price up to one-third, forcing the government to import pulses and onions to offset the impact of a drought for the second straight year in much of the country.
Raghuram Rajan, governor of the Reserve Bank of India, has said the central bank expected to meet its 6 percent retail inflation target for January and will focus on its 5 percent target for March 2017.
He cut the benchmark policy rate by a half percentage point to 6.75 percent in September, after months of pleading by government leaders and industrial groups.
Analysts said the central bank may leave rates unchanged in its policy review meeting in December and might wait for the US Fed decision on interest rates and cues from the annual budget in February before considering a rate cut.
"We expect the RBI to stay on hold for the next two policy meetings. A residual cut of 25 bps is possible by March/April 2016, depending on the Union Budget outcome," said A. Prasanna, economist at ICICI Securities Primary Dealership.
"We expect headline inflation to average around 5.8 percent in the January to March quarter, in line with the RBI's trajectory," he said.
(Additional reporting by Karen Rebelo and Neha Dasgupta in MUMBAI; Editing by Malini Menon and Nick Macfie)
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