UPDATE 1-India Feb inflation picks up slightly, but April rate cut still seen

India's consumer prices rose at a faster pace than anticipated in February, and remained below the central bank's target for a seventh straight month, lending weight to expectations that the bank could again cut the key interest rate in April.

India's annual retail inflation picked up in February to 2.57 percent, after easing to a downwardly revised 19-month low of 1.97 percent in January, government data showed on Tuesday. Analysts polled by Reuters had forecast February's annual increase in the consumer price index at 2.43 percent.

February's marginal increase in inflation stemmed from higher costs of housing, health, education services and fuel. Health and education costs rose more than 8 percent in February from a year earlier, the data showed. Economists say inflation remains subdued because of high unemployment and declines in rural incomes following a fall in food prices and in demand for exports.

The unemployment rate rose to 7.2 percent in February, the highest since September 2016, and up from 5.9 percent in February 2018, according to data compiled by the Centre for Monitoring Indian Economy. Rupa Rege Nitsure, chief economist at L&T Finance Holding in Mumbai, said weak food inflation would keep rural demand subdued and would gradually bring down core inflation.

"This strengthens the case for another rate cut in April with a strong commentary on transmission," she said. Figures released separately on Tuesday showed annual industrial output growth rose 1.7 percent in January compared with an upwardly revised 2.6 percent the previous month.

Economic growth slowed to a five-quarter low of 6.6 percent in October-December, and the government estimate for the financial year ending this month has been revised down to a five-year low of 7 percent from 7.2 percent. On April 4, the Reserve Bank of India's Monetary Policy Committee (MPC) is widely expected to cut the benchmark repo rate for the second straight meeting.

Its shock 25 basis point cut to 6.25 percent in February - at Governor Shaktikanta Das' inaugural meeting - was the first in 18 months. Declining inflation had cleared the path for the MPC to cut again as a widening gap between inflation and borrowing costs was hurting companies' balance sheets as they are unable to pass on the interest costs to consumers amid low inflation, business leaders said.

Core consumer inflation, which strips out food and fuel prices, was estimated at 5.3-5.4 percent in February, slightly higher than January's downwardly revised 5.2-5.3 percent, according to three analysts after seeing inflation figures released on Tuesday. Retail food prices fell for the fifth straight month, by 0.66 percent in February from a year earlier, compared with a drop of 2.24 percent a month earlier. The figures show rural incomes remain under pressure while consumers benefit from easing inflation.

(Additional reporting by Suvashree Dey Choudhury in MUMBAI and Krishna V Kurup in BENGALURU Editing by Richard Borsuk, Robert Birsel)

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