New Delhi: India’s inflation rate unexpectedly fell to a seven-month low, giving the central bank room to reduce borrowing costs to spur growth after last week’s terrorist attacks weakened investor sentiment.

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/Content/Videos/2008-12-05/0412_Inflation_Stimulus_Pkg_MINT_TV.flv19b6357e-c221-11dd-ab22-000b5dabf613.flvWholesale prices rose 8.40% in the week to 22 November from a year earlier after gaining 8.84% in the previous week, the commerce ministry said in New Delhi on Thursday. Economists were expecting an increase of 8.95%.

“We expect the central bank to cut interest rates by up to 100 basis points within the next four weeks," said Deepak N. Lalwani, director for India at Astaire and Partners Ltd, a London-based stockbroking company. The terrorist atrocity has rocked sentiment for the short term. One basis point is one-hundredth of a percentage point.

At least 183 people died when terrorists attacked various locations in India’s financial capital of Mumbai on 26 November.

Yields on India’s benchmark 10-year government bonds have dropped 30 basis points since then on expectations of a rate reduction. The yield fell 1 basis point to 6.79% in Mumbai after the inflation report.

Also See Slowdown Effect (Graphic)

Inflation has tumbled from a 16-year high of 12.91% in August as a global recession drives down prices of oil and other commodities. Inflation may slow to 7% by 31 March, the central bank had said on 24 October.

Manufacturing product prices are seen to soften, giving the central bank leeway to cut rates, said Shubhada M. Rao, an economist at Yes Bank Ltd in Mumbai.

Since October, the Reserve Bank of India (RBI) has lowered its repurchase rate by—its main short-term lending rate—1.5 percentage points. It has also reduced the amount of deposits that lenders need to set aside as cash reserves and in government bonds by 3.5 percentage points and 1 percentage point respectively, to stimulate demand.

RBI may reduce the repurchase rate by as much as 1.5 percentage points to 6% as part of a government spending plan to revitalize the economy, ‘The Economic Times’ reported on Wednesday, citing a government official it didn’t name.


Graphics by Ahmed Raza Khan / Mint

Video by Taneesha Kulshrestha