New Delhi: Inflation held near an 11-month low, giving room to the Reserve Bank of India (RBI) to cut interest rates for the fifth time since October at its meeting next week.
Wholesale prices climbed 5.6% in the week ended 10 January from a year earlier after gaining 5.24% the previous week, the commerce ministry said on Thursday. Economists expected an increase of 5.05%.
Policymakers around the globe are slashing borrowing costs and boosting spending as the world economy grapples with its worst crisis since the Great Depression.
RBI will lower its benchmark repurchase rate to 5% from 5.5% in its 27 January statement, according to eight of 16 economists surveyed by Bloomberg.
Also See Wholesale Prices (Graphic)
“The trajectory of inflation is clearly downwards and hence we still expect the Reserve Bank to cut rates next week,” said Sonal Varma, an economist at Nomura International Plc. in Mumbai. “The unexpected rise in inflation is a one-off reading due to the truckers’ strike.”
India’s inflation rate increased for the first time in nine weeks in the week ended 10 January, mainly due to a rise in food prices, Thursday’s report showed.
More than four million Indian truckers, who haul a majority of the nation’s goods, went on a nation wide strike from 5 to 12 January, causing shortages, and hampering the transportation of food and manufactured products in many parts of the country.
Bonds fell on concern faster inflation will erode the returns from debt. The 2018 bond yield ended at 5.81%, off the day’s high of 6%, as a sharp decline in prices attracted investors. It ended at 5.89% on Wednesday.
Bond dealers said the yield movement reflects that the market is divided on the possible course to be taken by RBI at its next meeting.
“The real interest rate in our economy is high. We would need concerted efforts on both repo and reverse repo rate,” said Rana Kapoor, managing director and chief executive of Yes Bank Ltd. “I see a rationale for a 50 basis points cut in both repo and reverse repo rate.’’
“The Reserve Bank of India had recently slashed key policy rates hence they would wait to see the possible impact of those actions before they revise rates further,’’ said Tarini Vaidya, head of trading at HDFC Bank Ltd.
According to Arvind Sampath, director, Standard Chartered Bank the market is divided on what RBI will do. “This is not denying that in the medium term rates have to be far lower than what it is now, inflation has to be between zero and 1%,” Sampath said.
Inflation in India has more than halved from a 16-year high of 12.91% in August as a global economic slump drives down prices of oil and other commodities. That’s given the government and the central bank the opportunity to unveil measures to spur a slowing economy.
Crude oil futures traded in New York have slumped 72% since a record $147.27 a barrel on 11 July. The decline allowed the Union government to cut retail petrol and diesel prices on 5 December.
Inflation may further decline as the government prepares to lower retail fuel prices once more ahead of national elections due by May. “The government is considering such a reduction,” petroleum and natural gas minister Murli Deora had said on 7 January.
RBI has cut its repurchase rate by 350 basis points since October.
Prime Minister Manmohan Singh has also increased government spending. One basis point is one-hundredth of a percentage point.
Thursday’s inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry on Thursday revised inflation rate for the week ended 15 November to 8.66% from 8.84%.
A Mint staff writer contributed to this story.
Graphics by Paras Jain / Mint