The inflation rate fell below the central bank’s target for the first time in nine months, reducing the need for further interest-rate increases.
Wholesale prices rose 4.85% in the week ended 26 May from a year ago, slowing from 5.06% in the previous week, the commerce ministry said on Friday. That was below all estimates in a Bloomberg survey of 12 analysts, where the median forecast was a 5.05% increase.
A pause in the Reserve Bank of India’s (RBI) two-and-a-half year policy of raising interest rates will help bolster economic growth, which it expects will slow for the first time in three years. The Mumbai-based central bank aims to contain inflation at below 5% in the fiscal year ending 31 March.
“Easing inflation will keep the Reserve Bank interest rates on hold,” said Rajeev Malik, senior economist at JPMorgan Chase & Co. in Singapore. “The bank may, however, increase the issuance of sterilization bonds if capital flows increase.”
Bonds pared losses after the inflation report. The yield on the benchmark 8.07% bond, due January 2017, dropped 1 basis point to 8.13% as of 1.10pm in Mumbai.
RBI, which sells bonds to mop up surplus cash injected as a result of its dollar purchases, said in April that it may drain as much as Rs1.1 trillion ($26.8 billion), in the year to 31 March, from Rs80,000 crore it originally estimated. The central bank resumed the sale of bonds that would remove excess funds in March after a gap of two months.
Kotak Mahindra Bank Ltd expects remittances and foreign investments to increase by 15% to $65.5 billion and $23 billion, respectively, in the year ending 31 March.
“There appears to be growing acknowledgment that more cash reserve ratio increases might be overkill,” said Malik.
The central bank has increased the cash reserve ratio, or the amount of money banks have to set aside against their deposits, three times since December to mop up funds and slow the fastest pace of loans in more than 35 years in the country that’s fuelled excess demand for farm and manufactured products.
Rising interest rates and reserve requirements have prompted commercial banks to increase their lending rates by between 200 and 250 basis points since December. State Bank of India, the nation’s biggest commercial bank, currently charges its best borrowers 12.75%, the highest since April 1999.
India’s economy may slow to 8.5% in the year ending 31 March, the central bank forecast on 29 April, from 9.4% in the previous year.
To combat inflation, RBI has also allowed the rupee to gain to near a nine-year high to make imports cheaper. The appreciation of the currency, which makes exports less competitive, may not hurt India’s expansion as overseas sales make up only about a 10th of the $854 billion economy.
The government has also started importing wheat for a second year and halted the overseas sale of lentils to check food prices. The government on Friday revised the inflation rate for the week ended 31 March to 5.94% from 5.74%. The government revises the inflation rate after a delay of two months on additional price data. Bloomberg