New Delhi: India’s inflation slowed to a four-month low, giving the Reserve Bank of India (RBI) room to keep injecting cash into the financial system without fanning prices.
Wholesale prices rose 11.44% in the week to 4 October from a year earlier after gaining 11.8% in the previous week, the commerce ministry said in a statement on Thursday.
The Wholesale Price Index fell because of a decline in the prices of fuel products such as jet fuel, naphtha and furnace oil. The index of manufactured products that includes cooking oil, food products and steel dropped to 9.69%, compared with 10.33% a week ago, Thursday’s report said.
Weaker price gains and a shortage of money in the banking system have allowed the central bank to shift its focus from fighting inflation to stimulating an already slowing economy. RBI on Wednesday night lowered the amount of deposits that lenders need to set aside for the second time in a week to ease the worst cash shortage in the economy since 2000.
Also See Some Respite (Graphic)
The central bank is “opening all taps to infuse liquidity into the system”, said Tushar Poddar, a Mumbai-based economist at Goldman Sachs Group Inc. “In the current extremely difficult global environment, with tight liquidity, weakening activity and falling commodity prices, the RBI should prioritize financial stability and growth concerns over inflation.”
The country’s 10-year bonds extended gains after the report. The yield on the benchmark 8.24% note due April 2018 slid 19 basis points to 7.72% at the close in Mumbai, according to the central bank’s trading system.
RBI reduced its cash reserve ratio to 6.5% from 7.5%, a move which will add Rs40,000 crore into the financial system. India also accelerated loan payments to banks and doubled the overseas investment limit in corporate bonds to shore up the rupee.
“The host of measures announced yesterday (Wednesday) are directed towards ensuring the smooth functioning of the financial system,” said Manas Paul, an economist at HSBC Group Plc. in Bangalore. “Attention in policy circles is possibly shifting to prop up growth from inflation.”
A shortage of credit, which worsened after the collapse of Lehman Brothers Holdings Inc. last month, is dragging down a global economy already hit by a record surge in oil prices this year. The International Monetary Fund (IMF) last week forecast that global growth will slow to 3% in 2009, from 3.9% this year and 5% in 2007. That would mean a world recession under IMF’s informal definition.
India’s $1.2 trillion (Rs58 trillion) economy is expected by RBI to expand 8% in the year to March, the slowest pace in four years. 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 9 August to 12.82% from 12.63%.
Graphics by CSO