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Inflation drops to 3.92%; rate cuts seen

Inflation drops to 3.92%; rate cuts seen
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First Published: Thu, Feb 19 2009. 01 56 PM IST
Updated: Thu, Feb 19 2009. 01 56 PM IST
New Delhi: Indian inflation fell to its lowest in more than 13 months in early February, dropping below 4%, and analysts said the data made it more likely the Reserve Bank of India (RBI) would cut rates to support faltering growth.
The wholesale price index, India’s most widely watched inflation measure, rose 3.92% in the 12 months to 7 February, lower than the previous week’s 4.39% and below a forecast of 4.01% in a Reuters poll.
It was the lowest inflation reading since 29 December 2007 when it stood at 3.83%. It was 4.98% a year ago.
Bond yields eased marginally, with that of the benchmark federal bond inching down one basis point to 6.29%. It later rose to 6.32% by 0740 GMT.
“Weakening economic activity and lower than expected inflation data suggest that there is clearly more room for rate cuts,” said Sonal Varma, economist at Nomura in Mumbai.
“We expect the RBI to cut both the repo and reverse repo rates by 50 basis points before March and by another 100 basis points each by June 2009.”
On Wednesday, Reserve Bank of India (RBI) Governor Duvvuri Subbarao said in Tokyo there was room to cut rates, but the question was when and by how much.
He, however, said a fall in inflation does not automatically mean rates will drop, too.
After a series of cuts since October, the bank’s key lending rate, the repo, stands at 5.5%, while the reverse repo is at 4.0%.
Wholesale prices, which peaked at close to 13% in early August, have fallen tracking substantial drops in prices of commodities, cuts in state-set fuel prices and lower factory gate duty rates.
On Monday, the finance minister said the country had weathered an inflation crisis but there was no room for complacency.
The economy is expected to grow 7.1% in the fiscal year to end March, a six-year low, as the global slump and high borrowing costs at home trip up activity.
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First Published: Thu, Feb 19 2009. 01 56 PM IST