New Delhi: Inflation slowed to a 13-month low, increasing chances the central bank may cut interest rates to support a weakening economy. Bonds rose.
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Wholesale prices climbed 3.92% in the first week of February from a year earlier after gaining 4.39% the previous week, the Union commerce ministry said on Thursday. Economists expected an increase of 4.01%.
Reserve Bank of India (RBI) governor D. Subbarao said on Wednesday there was room to reduce borrowing costs as the impact of the global recession on Asia’s third largest economy had been much sharper than expected. Inflation has eased from a 16-year high of 12.91% in August on lower commodity and energy prices. “The rapid fall in inflation is providing the central bank with additional headroom for further monetary accommodation,” said Siddhartha Sanyal, an economist with Edelweiss Capital Ltd in Mumbai.
Bonds rose after the inflation data slowed more than economists expected. 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 1.10pm. One basis point is one-hundredth of a percentage point. RBI kept interest rates unchanged in its policy review on 27 January after reducing them to an unprecedented low on 2 January. The repurchase rate, which has been cut four times since October, is at 5.5% and the reverse repurchase rate is at 4%.
Inflation is slowing due to cheaper fuel costs. The government reduced retail fuel prices on 28 January for the second time in less than two months amid a slump in crude oil prices. The index of energy products fell 3.03% in the week, Thursday’s report showed while the manufacturing products inflation slowed to 4.94% from a gain of 5.52% in the previous week.
The $1.2 trillion (Rs60 trillion) economy is likely to expand 7.1% in the 12 months to 31 March, the government said on 9 February. That would be the slowest pace of expansion in six years and follows an annual average growth of more than 9% in the previous three years. Today’s inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry on Thursday revised the inflation rate for the week to 13 December to 6.24% from 6.61%.
Video by Rahul Sharma
Reuters contributed to the story