NEW DELHI (Reuters) - India's retail inflation eased for a third straight month in October, helped by smaller rises in food prices, boosting the chances of an interest rate cut by the central bank next month.
Consumer prices <INCPIY=ECI> rose by an annual 4.20 percent last month, their slowest pace in 14 months, government data showed on Tuesday.
The figure matched the median consensus in a Reuters' poll of economists. Retail prices were up 4.39 percent in September on the year.
Food inflation was 3.32 percent, lower than 3.96 percent recorded in September.
The data comes days after Prime Minister Narendra Modi ordered the withdrawal of large denomination banknotes from circulation, in a shock "demonetization" drive to fight tax evasion, corruption and forgery.
The sudden move to cancel old 500-rupee and 1,000-rupee banknotes, which accounted for 86 percent of the cash circulating in Asia's third-largest economy, has caused huge disruption to daily life, depressing consumer demand.
People struggling to get new bills are holding back on spending, except for immediate and urgent needs. The price of fresh produce has collapsed in food markets, leaving farmers and traders sitting on rotting stocks.
Once the initial shock wears off, the formal economy is likely to expand at the expense of fly-by-night traders who deal in cash. That in turn may improve the efficiency of markets and make it easier for the Reserve Bank of India's (RBI) to hit its medium-term inflation target of 4 percent.
"The 'black money' drive will increase the pace of deceleration, specifically in the service sector, which has a lot of cash transactions," said Soumya Kanti Ghosh, chief economist at State Bank of India.
"I expect a rate cut in December and that won't be the end."
The RBI's recently formed monetary policy committee (MPC) is due to review rates on Dec. 6 and 7.
The monetary panel cut the repo policy rate by 25 basis points last month to a near six-year low of 6.25 percent.
While the odds have increased for another rate cut, some analysts reckon an impending interest rate increase in the United States could force a status quo until February.
The Federal Reserve is widely expected to raise interest rates at its meeting on Dec. 13-14, the first hike in a year.
There is also a worry that the demonetization drive could hit winter crops as farmers are facing problems in buying seeds and fertilizers.
"The situation is fairly fluid in the early days (of) post-demonetization," said Aditi Nayar, senior economist at ICRA.
"The MPC may choose to observe the evolving growth-inflation dynamics and defer a rate cut till the February 2017 policy review."
(Reporting by Rajesh Kumar Singh; Editing by Douglas Busvine, Clarence Fernandez and Richard Balmforth)