New Delhi: India’s inflation slowed for a second week, beating expectations, as cuts in fuel prices and import tariffs made farm and manufactured products cheaper.
The key wholesale price inflation rate slowed to 6.05% in the week ended 17 February, from 6.63% in the previous week, the Ministry of Commerce & Industry said in its weekly inflation report released in New Delhi today. Analysts had estimated the inflation rate would be 6.25%.
Inflation stayed above the Reserve Bank of India’s tolerance level of 5% since September and the central bank may raise its key overnight lending rate next month for the second time this year to curb prices. Prime Minister Manmohan Singh’s Congress party lost two state elections this week as inflation eroded the spending power of people.
“The economy is growing above trend and inflation is high,” said Maya Bhandari, an economist at Lombard Street Research Ltd. in Mumbai. “Interest rates need to rise.”
Record economic growth, boosted by the fastest increase in bank loans in more than three decades and higher salaries, have stoked prices of agricultural and manufactured products. India’s central bank last month unexpectedly increased the amount of cash lenders have to set aside to cover deposits for the second straight month to curb inflation.
The yield on the benchmark 8.07% note due January 2017 fell 2 basis points to 7.91% as of 12:20 p.m. in Mumbai, according to the central bank’s trading system.
India lowered the price of auto fuels by as much as 4.5% effective 16 February, the second cut in 2 1/2 months. Finance Minister Palaniappan Chidambaram this week cut tariffs on diesel and other goods in his budget for the fiscal year starting 1 April. The cuts were the second in five weeks after Chidambaram in January unexpectedly cut import duties on products ranging from sulphur to steel.
India’s $854 billion economy, the fourth-biggest in Asia, may expand at a record 9.2% in the year ending 31 March, following a 9% gain last year, making it the world’s second-fastest growing major economy after China.
The Reserve Bank has over the past two years tried three different policy tools to contain inflation — the reverse repurchase rate, or the overnight borrowing rate, the repurchase rate, or the overnight lending rate, and the cash reserve ratio.
The central bank on 13 February unexpectedly increased the cash reserve ratio, ordering commercial banks to keep cash equivalent to 6 percent of deposits starting 3 March instead of the earlier 5.5%. The measure was aimed to drain as much as Rs140 billion from the banking system, it said.
The move came after it raised the overnight lending rate on 31 January for the fifth time in a year to cut money availability.
Bank loans increased more than 30% in each of the past two fiscal years, outpacing the 23% growth in deposits, according to central bank data.
Workers in India this year can expect a 7% increase in their annual real salaries, after adjusting for inflation, the biggest increase among 45 countries including US and Japan surveyed by human resources consultant ECA International.
The government today revised the inflation rate for the week ended 23 December to 5.78% from 5.48%. The government revises the inflation rate after a delay of two months on additional price data.
Singh’s Congress party lost power in the northern states of Punjab and Uttarakhand among three state elections this month. The government wants to curb inflation before polls in April in the more critical state of Uttar Pradesh, which selects a seventh of all lawmakers in parliament. The election outcome in Uttar Pradesh will set the tone for the next general elections due by April 2009.