New Delhi: India’s inflation fell to the lowest since 2002, giving the Reserve Bank of India (RBI) room to add to Wednesday’s cut in interest rates.
Wholesale prices rose 3.03% in the week to 21 February from a year earlier after gaining 3.36% the previous week, the commerce ministry said in New Delhi on Thursday. Economists expected an increase of 3.07%.
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RBI governor D. Subbarao on Wednesday slashed interest rates for the fifth time since October to revive an economy growing at the slowest pace in six years. Economists said further cuts can be expected as the global recession threatens to pummel India.
“Rapidly falling inflation, increased downside risk to growth and the hefty market borrowing requirement of the government will prompt the Reserve Bank to cut rates further,” said Rajeev Malik, regional economist at Macquarie Group Ltd in Singapore. He expects RBI to lower borrowing costs by another 100-150 basis points by June. One basis point is one-hundredth of a percentage point.
RBI on Wednesday reduced its key repurchase rate, or the rate at which it injects liquidity into the financial system, to an all-time low of 5% from 5.5%, and the reverse repurchase rate, or the rate at which it sucks out excess liquidity, to 3.5% from 4%. The bank has cut the repurchase rate by 400 basis points since October and the reverse repurchase rate by 250 basis points.
The inflation rate may drop to close to zero in two months as the price index rose at a faster pace last year, said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd, the local unit of Standard and Poor’s. “It should not be a cause for concern for the central bank as the chances of India facing a deflation are remote.”
India’s wholesale price inflation is likely to slow to below 3% by the end of this month, according to RBI.
Inflation in the week to 21 February slowed as the manufactured price inflation, with a 64% weight in the inflation basket, eased to 4.51% from 4.67% in the previous week. Prices of fruits, vegetables, salt, edible oil and metals declined in the week.
While the country’s benchmark Wholesale Price Index has slowed, other gauges of inflation the central bank takes into account when deciding policy are at a decade high.
Inflation, as measured by the consumer prices paid by industrial workers, quickened to 10.45% in January, the highest since December 1998. This index takes into account prices for house rentals, toiletries, phones and school fees.
The consumer price index for farm workers increased 11.62% in January from a year earlier, following an 11.14% gain in December.
“With wholesale inflation having moderated significantly, consumer price inflation may also be expected to decline, though with a lag,” the central bank said.
Thursday’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 27 December to 5.86% from 5.91%.
Graphics by Paras Jain / Mint