New Delhi: India's wholesale price index (WPI) rose a lower-than-expected 6.87 percent in July from a year earlier, government data showed on Tuesday.

Analysts on average had expected an annual rise of 7.37 percent. The annual reading for May remained unchanged at 7.55 percent. June's inflation was provisionally put at 7.25 percent.

COMMENTARY

RAJEEV MALIK, SENIOR ECONOMIST, CLSA, SINGAPORE

"The headline inflation number is pleasantly lower than expected, but there are several details that are not comforting. Core inflation is higher; we have not seen the fuel price adjustment, and the drought impact coming through.

"Part of the reason food inflation is lower is to do with what's happened to vegetable prices. But the WPI outcome is not game-changing number even though it is better than expected.

"The positive is that May numbers have not been revised upwards, but there is a very high probability that the July inflation number may be revised to slightly above 7 percent.

"There are several risks for the RBI to lose sleep over, including rising crude oil prices and lack of fiscal adjustment. Also remember, the RBI has front-loaded monetary easing with a 50 basis points rate cut. I think the RBI stays on hold on rates for the remainder of the year."

A. PRASANNA, ECONOMIST, ICICI PRIMARY DEALERSHIP LTD, MUMBAI

"This data cannot be taken as evidence that inflation is coming down. There are underlying risks. Crude prices have gone up, core inflation is higher, so this fall in inflation may be temporary. We still think it will be premature for the Reserve Bank of India to cut rates."

DARIUSZ KOWALCZYK, SENIOR ECONOMIST ASIA EX-JAPAN, CREDIT AGRICOLE CIB, HONG KONG

"The high core inflation will make it more difficult to cut rates despite decline of headline inflation.

"Thus, the September rate decision will likely be a judgment call by the central bank on whether they want to show confidence in the new finance minister and support growth, or stick to the tougher line. Weak industrial output and very poor exports suggest that there is rate cut scope, but we need to see how monsoon develops and what the outlook will be for food prices by then.

"Still, overall, the data is positive for the INR and should push the INR OIS down."

NITESH RANJAN, ECONOMIST, UNION BANK OF INDIA, MUMBAI

"Except for headline number which is lower due to base effect in fuel group index, major sub-indices have shown higher monthly change than their first quarter average. Spike in core inflation from their sub-5 percent level in Q1FY13 is definitely not comfortable from policy rate perspective.

"Though RBI's focus is on controlling inflation and market does not see any rate cut until price pressures ease, I think next policy action will be triggered more by the extent of dip in growth indicators rather than inflation numbers. However, no rate cut is expected in September."

RADHIKA RAO, ECONOMIST, FORECAST PTE, SINGAPORE

"Softer than expected July WPI print is likely to be perceived as a sign of easing inflationary risks, though we would be wary of revisions down the line, which could take the headline back above 7.0 percent. For the time being, this should partly calm nerves on possible runaway inflation, though thin supplies amid weak monsoon rains and increase in minimum support prices will exert upside pressures on food costs down the road.

"Weak rupee and adjustment in fuel prices also provide little comfort. Overall above-tolerance WPI and retail inflation will keep RBI wary on the policy front, with consumption sector's performance in Q2 GDP and August inflation numbers ahead of September review to also dictate policy direction. RBI will be unable to completely sidestep weak growth outlook and we retain our call for 50 bps cuts by end-FY."

RUPA REGE NITSURE, CHIEF ECONOMIST, BANK OF BARODA, MUMBAI

"While headline inflation has eased significantly in July on the back of an overall economic slowdown, the core inflation has sequentially risen by 59 basis points to 5.44 percent. Furthermore, a large part of inflation easing has happened because of administered prices of the fuel component. In my opinion, the next RBI policy action will be contingent upon some concrete fiscal steps to curtail fuel subsidies."

KUMAR RACHAPUDI, FIXED INCOME STRATEGIST, BARCLAYS CAPITAL, SINGAPORE

"Think the inflation number is low enough for the RBI to be comfortable, especially given the expectations. However, core inflation probably ticked higher and that remains a risk. We maintain our base case of another 100 bps rate cut in the fiscal year and suggest staying long on bonds."

INDRANIL PAN, CHIEF ECONOMIST, KOTAK MAHINDRA BANK, MUMBAI

"Headline inflation number is good but we continue to focus on the core and the food inflation. Food means limited chances of CPI coming off. So I am still not building in any rate cut hopes for 17th September."

SHUBHADA RAO, CHIEF ECONOMIST, YES BANK, MUMBAI

"Risks for inflation still remain on the upside. Some pressure on primary articles, in pulses and oilseeds, is likely to continue. In manufacturing, a weaker rupee and higher Brent prices are likely to exert pressure and the product price trajectory is not comforting.

"We expect inflation to be 7.5-8.0 percent this year, and also growth is likely to have downside risks. The April-June growth data could be in the range of 5.0-5.5 percent, and if it is so, then growth concerns at some point need to come under the central bank's consideration.

"We expect some monetary action in September or October policy. But it will also depend on how rains play out completely."

SHAKTI SATAPATHY, FIXED INCOME STRATEGIST, AK CAPITAL, MUMBAI

"The lower than expected number is quite surprising and has largely been a factor of cooling fuel index and vegetable prices. Considering the significant underlying risks in food and fuel price, persistency of such trend is unlikely and is considered to be a one-time affair.

"Further the rise in core inflation to 5.46 indicates demand pressures in the economy would be prevalent unless and until government's action plan with regards to supply bottlenecks and investment boosting strategies is not in place soon."

SUJAN HAJRA, CHIEF ECONOMIST, ANAND RATHI SECURITIES, MUMBAI

"The fall in inflation is transitory. I think inflation will move up from here on and will be around 8.5 percent by December. This number does not change anything from the rate perspective and we expect RBI to hold rates in September."

MARKET REACTION

* The benchmark 10-year bond yield dropped around 8 basis points to 8.15 percent from before the data, and compared with 8.20 percent at close on Monday.

* The 1-year OIS rate fell 4 bps to 7.73 percent from beforehand, while the 5-year OIS rate fell 3 bps to 7.03 percent.

* The rupee pared losses, trading at 55.64/65 against the dollar from about 55.72/73 before the data, while the Sensex swung to a gain of 0.4 percent, led by a rise in banks from mild losses earlier.

BACKGROUND

- RBI Governor Duvvuri Subbarao stuck to a hawkish tone on Monday, emphasising his concern that inflation remains too high and again prodding the government to restrain its own borrowing.

- Drought in some regions of the country have hit many crops and could pile pressure on food inflation in the coming months.

- Many economists have slashed their forecasts for India's growth in the current fiscal year to March to around 5.5 percent, saying weak summer monsoon rains have added to the economic headwinds.

- Industrial output fell for the third time in four months in June, adding to pressure on new Finance Minister Palaniappan Chidambaram to move quickly and pull Asia's third-largest economy from its worst slowdown in almost a decade.

- The Reserve Bank of India left interest rates unchanged in July for the second straight review, showing that bringing down stubbornly high inflation is its top priority even as economic conditions deteriorate.

(Agencies)

Latest News  from Business News Desk