Inflation drops to 13-month low at 4.28%; 10-year bonds gain

Inflation drops to 13-month low at 4.28%; 10-year bonds gain
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First Published: Sat, Jun 23 2007. 01 10 AM IST

Updated: Sat, Jun 23 2007. 01 10 AM IST
New Delhi: India’s inflation rate slowed to a 13-month low in the second week of June as prices of fruits, lentils and cereals declined, making it easier for the central bank to end its two-and-a-half year run of interest-rate increases.
Wholesale prices rose 4.28% in the week ended 9 June from a year ago, slowing from 4.8% the previous week, the ministry of commerce and industry said in Delhi on Friday. Analysts forecast inflation at 4.45%.
Finance minister Palaniappan Chidambaram wants to contain inflation without hurting economic growth, which he says is the antidote to poverty. India’s central bank raised benchmark rates nine times since October 2004 to damp consumer demand and may now rely on the delayed effect of raising borrowing costs to a five-year high to rein in inflation.
“The decline in inflation definitely takes away a lot of discomfort at the government’s level and obviously reduces pressure for immediate monetary policy action,” said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd in Mumbai.
A pause in the Reserve Bank of India’s (RBI) policy of raising interest rates will help bolster economic growth. India’s industrial production grew 13.6% in April, the government said on 12 June. India’s economy has averaged 8.6% growth since 2003, the second-fastest after China among the major economies, causing demand for manufactured and farm goods to outstrip supply and stoking prices.
The finance minister said it was too early to say whether inflation has been contained.
“The monetary measures have had an impact but it is too early to reach any conclusion,” Chidambaram said. “We need to watch the situation over the next four-five weeks. I maintain that we must strike a balance between growth and inflation.”
RBI will announce its next monetary policy on 31 July. The central bank can announce rate changes before the scheduled monetary policy review, as it has done three times since December.
To combat inflation, RBI has also allowed the rupee to gain to near a nine-year high to make imports cheaper. It has slowed dollar purchases on concern rupee funds injected from the exercise will stoke inflation.
Inflation is at its lowest since the week ended 29 April last year, when the rate was at 3.9%, according to data compiled by Bloomberg. It accelerated to 4.37% in the following week.
“RBI will definitely be comfortable with the softening of inflation,” said Prasanna Ananthasubramaniam, a fixed-income analyst at ICICI Securities Ltd. “The way inflation has behaved is in line with what the Reserve Bank has been saying.”
India’s 10-year bonds gained after inflation slowed more than expected. The yield on the 7.49% bond maturing in April 2017 fell 5 basis points this week to 8.23% in Mumbai, according to the central bank’s trading system. The price rose 0.35, or 35 paise per Rs100 face amount, to 95.06.
The yield, which moves inversely to the price, dropped to as low as 8.19% from 8.22% immediately after the report was released. A basis point is 0.01 percentage point.
To check prices of food grains, which have risen at almost twice the pace of manufactured product prices in the past year, the government removed the import duty on lentils in June 2006, and on wheat in September.
The government on Friday revised the inflation rate for the week ended 14 April to 6.34% from 6.09%.
The government revises the inflation rate after a delay of two months on additional price data.
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First Published: Sat, Jun 23 2007. 01 10 AM IST
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