New Delhi: India’s inflation slowed to an eight-month low, adding to optimism that the central bank may be close to ending its two-and-a-half-year run of interest-rate rises. The key wholesale price inflation rate fell to 5.27% in the week ended 12 May, from 5.44% in the previous week, the commerce ministry said in a statement on Friday. Analysts estimated inflation at 5.22%.
The Reserve Bank of India (RBI) expects inflation to slow towards its target of 5% because of higher interest rates and increased imports of foodgrains. The central bank may lift borrowing costs one more time to curb capital inflows, which spur demand in the economy and stoke inflation, analysts said.
“The Reserve Bank is close to the peak in its monetary tightening cycle,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd in Mumbai. “One more increase in the cash reserve ratio and the repurchase rate may still be required to neutralize the impact of robust foreign inflows.”
The yield on the 8.07% government bond due January 2017 was unchanged at 8.16% immediately after the data was announced, according to the central bank’s trading system.
Capital flows into India have made the rupee the third-best performer globally this year, gaining 8.3% against the dollar. RBI has slowed dollar purchases after buying a record $11.8 billion (Rs51,920 crore then) in February on concerns rupee funds injected from intervention will stoke inflation.
Kotak Mahindra’s Pan expects the central bank to increase its cash reserve ratio (CRR) by 50 basis points to 7%. He also expects the bank to raise its benchmark repurchase rate at which it lends overnight by 25 basis points to 8%. The Business Standard newspaper reported that the increase in CRR may be announced as early as Friday, citing people it did not identify.
RBI has raised CRR by 150 basis points since December and the repurchase rate six times in the past 17 months to damp consumer demand.
Pan expects remittances and foreign investments to increase by 15% to $65.5 billion and $23 billion, respectively, in the year ended 31 March.