Inflation at 11-month low, rate cut possible

Inflation at 11-month low, rate cut possible
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First Published: Thu, Jan 15 2009. 05 43 PM IST
Updated: Thu, Jan 15 2009. 05 43 PM IST
New Delhi: Indian inflation fell more than expected to an 11-month low in early January giving the Reserve Bank room to cut rates at its month-end policy review, but some analysts said it may hold off after aggressive recent moves.
The Reserve Bank slashed its main interest rates by 1 percentage point early this month, its fourth cut since October, and the government tried to draw more funds into the country to boost faltering growth in Asia’s third-largest economy.
The wholesale price index , India’s most widely watched inflation measure, rose 5.24% in the 12 months o 3 January, below the previous week’s 5.91% and marginally under a forecast of 5.28% in a Reuters poll.
Inflation is now well within the central bank’s forecast of around 7% for 2008/09, and some economists expect it to act on interest rates in its 27 January policy meet.
”There are talks of a second round of fuel price cuts and these cuts alone will bring inflation down to 3-4 percent,” said Sujan Hajra, an economist at Anand Rathi in Mumbai.
”This will give the RBI a lot of elbow room to further ease monetary policy,” Hajra said, referring to the Reserve Bank of India (RBI).
But others said the bank may prefer to assess the impact of its previous action before easing policy again.
”RBI will remain neutral in the coming monetary policy review. They have recently taken very aggressive measures and these measures generally take effect with a lag,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.
The latest inflation figure was the lowest reading since 9 February, when it stood at 4.98%.
India’s $1 trillion economy has shown clear signs of slowing amid the global financial crisis and high borrowing costs, after growing at 9% or more for the past three years.
Policymakers expect expansion to moderate to around 7% this fiscal year and the central bank chief has said 2009/10 looked like being an even more challenging year.
Early in December, the government cut state-set fuel prices for the first time in nearly two years, and oil minister Murli Deora has said it may lower them again by the end of January.
On Thursday, a senior government source said the issue had not been discussed at a cabinet meeting, and added a decision would take a few days.
For the second successive week, provisional inflation data was revised downwards. Inflation in the week to 8 November was lowered to 8.71% from the provisional 8.90%, indicating a sharp drop in price pressures.
Financial markets were largely unmoved by the data. The partially convertible rupee was at 49.01/02 per dollar, unchanged from before while the 10-year bond yield rose 3 basis points to 5.51% after the data.
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First Published: Thu, Jan 15 2009. 05 43 PM IST