Inflation rate drops to 8%; lowest in seven months

Inflation rate drops to 8%; lowest in seven months

New Delhi: Inflation rate fell to a seven-month low, making it more likely the Reserve Bank of India (RBI) will add to three interest rate cuts in less than two months to shore up a slowing economy. Bonds rose.

Also See Steady Decline (Graphic)

Wholesale prices increased 8% in the week to 29 November from a year earlier after gaining 8.4% in the previous week, the commerce ministry said.

Indian policymakers have lowered interest rates and taxes and boosted government spending to prop up economic growth. Asia’s third largest economy will face a period of painful adjustment as the world sinks into recession, RBI had said last week.

“The risks are clearly towards even more aggressive cuts as growth continues to falter and inflation declines rapidly," said Tushar Poddar, an economist at Goldman Sachs Group Inc. in Mumbai adding: “Inflation is on a downward trajectory and we expect it to continue to fall sharply going into next year."

Bonds rose after the inflation report was released. The yield on the 2018 bond closed at 6.46% in Mumbai, from Wednesday’s close of 6.63%. A basis point is 0.01 percentage point.

RBI had on 6 December reduced its benchmark repurchase rate by 1 percentage point to 6.5%, the third cut since October. On the following day, the government announced a Rs20,000 crore economic stimulus package.

The global recession is driving down prices of oil and other commodities, slowing inflation across Asia and prompting the region’s central banks to cut borrowing costs. China lowered its key lending rate by the most in 11 years to 5.58% on 26 November. Chinese consumer prices rose 2.4% in November from a year earlier, the slowest pace in two years.

Lower commodity prices and slowing domestic demand have contributed to a faster-than-expected reduction in inflation, RBI said in a statement on 6 December. Global crude oil prices have tumbled 70% after reaching a record high of $147.27 (Rs7,143) a barrel in July. India relies on overseas crude to meet three-quarters of its needs.

India’s inflation has declined from a 16-year high of 12.91% in August. Wholesale price growth may slow to 7% by March, RBI said on 24 October.

“We will review our inflation forecast in the next monetary policy," RBI governor D. Subbarao said in Kolkata on Thursday. “The developments so far will be reflected in our assessment."

The inflation rate in the week to 29 November fell as fuel price growth slowed to 4.48% from 5.28% in the previous week, Thursday’s report showed. Prices of manufactured goods rose 7.86%, lower than the 8.15% increase in the previous week.

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 4 October to 11.49% from 11.44%.

Graphics by Paras Jain / Mint