Indian Inflation Eases to Nine-Month Low on Oil Costs

26 Dec 2008 • by Natalie Aster

India’s inflation slowed to a nine- month low, giving the central bank room to cut interest rates further to support a faltering economy.

Wholesale prices increased 6.61 percent in the week to Dec. 13 from a year earlier after gaining 6.84 percent the previous week, the commerce ministry said in New Delhi today. That matched the median estimate of 17 economists surveyed by Bloomberg News.

Inflation in India has fallen below the central bank’s 7 percent fiscal year-end target amid lower fuel costs. Easing prices may allow central bank Governor Duvvuri Subbarao to cut interest rates for the fourth time in two months and implement the “aggressive monetary policy” the finance ministry says the country needs to support growth.

“The declining inflation trend will continue and that gives the Reserve Bank of India enough legroom to cut borrowing costs,” said Prasanna Ananthasubramaniam, an analyst in Mumbai at ICICI Securities Ltd. “A further cut in rates will help minimize the downside risks to growth and restore confidence in the markets.”

Bonds rose after the inflation report. The yield on the 8.24 percent note due April 2018 fell one basis point to 5.55 percent in Mumbai.

Inflation is likely to slow to 5 percent by the end of March, Arvind Virmani, the finance ministry’s top economist, said this week.

Rate Cuts

Slowing inflation has prompted central banks to cut interest rates as economies slow globally. China cut interest rates for the fifth time in three months on Dec. 22. The Bank of Japan reduced its benchmark rate to 0.1 percent on Dec. 19 and the U.S. Federal Reserve lowered its main rate to as low as zero on Dec. 16.

The Reserve Bank of India lowered the benchmark repurchase rate by 2.5 percentage points to 6.5 percent in three cuts from Oct. 20 to Dec. 6. The bank raised the rate to a seven-year high of 9 percent in July.

Growth in India, Asia’s third-largest economy, may slow to 7 percent in the year ending March 31 from 9 percent or more in the previous three years, according to the government, which on Dec. 7 announced a 200 billion-rupee ($4-billion) stimulus package to revive spending.

The fuel-price index in the week to Dec. 13 fell 0.18 percent from a year earlier, today’s report showed. Prices of manufactured goods, including cooking oil, iron, steel and chemicals, rose 7 percent, slower than the 7.3 percent gain in the previous week.

Today’s inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry increased the inflation rate for the week ended Oct. 18 to 10.82 percent from 10.68 percent.

Source: Bloomberg