New Delhi: Inflation fell more than expected to a 10-month low in late December and is seen heading sharply lower on the back of an expected fuel price cut, giving authorities greater freedom to prop up stumbling growth.
The wholesale price index, India’s most widely watched inflation measure, rose 5.91% in the 12 months to 27 December, slower than 6.38% in the previous week and below a forecast of 6.09% in a Reuters poll.
With inflation now well within the Reserve Bank of India’s forecast of around 7% for 2008/09, some economists expect it to cut interest rates again at its 27 January policy review to support an economy slowing faster than predicted.
“Clearly inflation has declined at a much more rapid pace than what we had anticipated. Though there may be some blips, like the truckers’ strike, it is heading towards 2% by March,” said Abheek Barua, chief economist at HDFC Bank in New Delhi.
“The headroom for more fiscal and monetary measures has increased more than what we had anticipated in December.”
The latest figure was the lowest inflation reading since 23 February, when it stood at 5.69%.
India’s central bank slashed its main interest rates by 1 percentage point last week, its fourth cut in four months, and the government tried to draw more funds into the country to boost faltering growth.
India’s $1 trillion economy, Asia’s third-biggest, has shown persistent signs of slowing amid the global financial crisis and high borrowing costs at home, after growing at 9% or above for the past three years.
Economists and policymakers expect expansion to moderate to around 7% this fiscal year and the central bank chief has said 2009/10 looked like being an even more challenging year.
Early in December, the government cut state-set fuel prices for the first time in nearly two years, and oil minister Murli Deora has said it may lower them again by the end of January.
A nationwide strike by tens of thousands of Indian truck drivers is pushing up prices of some commodities and threatening to choke supplies of fruit and vegetables.
Reversing a trend of higher revisions to past data, the inflation reading for 1 November was revised downwards to 8.70% from the provisional 8.98%, indicating a rapid drop in price pressures.
Financial markets were mostly unmoved by the data. The partially convertible rupee strengthened marginally to 48.90 from 48.98, while the 10-year bond yield was unchanged at 6.03%.