New Delhi: Inflation slowed to a five-month low, giving the Reserve Bank of India (RBI) room to reduce borrowing costs to shore up a slowing economy.
Wholesale prices rose 8.9% in the week to 8 November from a year earlier after gaining 8.98% in the previous week, the commerce ministry said in New Delhi on Thursday. That was less than the median forecast of 9% in a ‘Bloomberg’ survey of 13 economists. The inflation rate has dropped from a 16-year high of 12.91% in the week to 2 August.
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RBI has scope to cut borrowing costs further as inflation approaches a level “we can live with,” finance minister P. Chidambaram said in an 18 November interview. Growth in India’s Rs1.2 trillion economy is weakening as a simultaneous recession in the US, Europe and Japan crimp demand for the nation’s exports.
“The slowdown in inflation gives a great deal of comfort to the Reserve Bank to move ahead in cutting interest rates and to give a push to the growth momentum,” said Shubhada Rao, an economist at Yes Bank Ltd in Mumbai. “There is a clear shift in focus.”
Bonds extended gains after the inflation report. The yield on the benchmark 10-year note fell to 7.23%, the lowest since January 2006, from 7.25% earlier. The price rose 1.3 per 100 rupee face amount to 106.92.
Prime Minister Manmohan Singh had on 17 November reviewed India’s “liquidity situation” in a meeting attended by RBI governor D. Subbarao and “advised him to keep a very close and constant vigil over the situation and act as appropriate,” Chidabmaram said.
RBI has cut its benchmark lending rate twice in the past month, lowering it to 7.5% from a seven-year high of 9%. It also pared the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as Rs1.4 trillion in cash to ease lending.
The wholesale price index fell in the week to 8 November because of a decline in the prices of fuel products such as jet fuel, furnace oil and naphtha.
The oil index fell after Indian oil companies, including Indian Oil Corp. Ltd, the nation’s largest refiner, cut the price of jet fuel by 4%.
The index of manufactured products that includes cooking oil and steel products, with a 63.7% weighting in the inflation basket, dropped to about 1% in the week, Thursday’s report showed.
Declining oil and commodity prices are cooling inflation across Asia, providing policymakers with scope to reduce borrowing costs to stimulate growth. Crude oil has fallen by 64% after climbing above $147 a barrel for the first time in July, while corn and wheat prices are also down by more than half from records reached earlier this year.
Thursday’s inflation rate may be revised in two months, after the government receives additional price data.
The commerce ministry increased the inflation rate for the week ended 13 September to 12.42% from 12.14%.
Graphics by Ahmed Raza Khan / Mint