Slowing demand pushes inflation to nine-month low

Slowing demand pushes inflation to nine-month low

New Delhi: Inflation rate fell to the lowest level since early March as demand slowed amid the global meltdown and a drop in crude oil costs led the government to cut retail fuel prices.

Wholesale prices increased 6.84% in the week ended 6 December from a year earlier after gaining 8% the previous week, the commerce ministry said on Thursday. Economists expected an increase of 7.49%.

Inflation slowed as the fuel-price index fell 3.7% from the previous week, Thursday’s report showed. Prices of manufactured goods, including cooking oil, iron, steel and chemicals, fell 0.3%.

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Bonds rose amid speculation that slowing inflation will give the Reserve Bank of India (RBI) room to add to three interest-rate cuts in the past two months as growth falters. India’s monetary policy should have been “more aggressive" to counter the impact of the global financial crisis, Arvind Virmani, the finance ministry’s chief economic adviser, had said on Wednesday.

ae9cd798-cd1a-11dd-8a91-000b5dabf636.flv“There is a massive downside risk to economic growth and that is the reason for a turnaround in monetary policy" after three years of tightening, said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd, the local unit of Standard and Poor’s. “We expect the Reserve Bank to reduce the repurchase rate by another 100 basis points."

India’s 10-year bonds extended gains after the inflation report, pushing yields to a four-and-a-half year low of 5.53% on Thursday in Mumbai.

RBI governor D. Subbarao, a little more than three months into the job, has reversed his predecessor’s monetary tightening to protect the economy, forecast to expand at its weakest pace since 2003 in the current fiscal.

RBI had on 6 December cut its benchmark repurchase rate to 6.5% from 7.5%. The following day, the government announced a Rs20,000 crore stimulus package to revive spending, including lower taxes on consumer goods such as cars and motorcycles.

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 11 October to 11.3% from 11.07%.