Inflation eases to a 9-month low; paves way for rate cuts

Inflation eases to a 9-month low; paves way for rate cuts

New Delhi: Inflation slowed to a nine-month low, giving the Reserve Bank of India (RBI) room to cut interest rates further to support a faltering economy.

Wholesale prices increased 6.61% in the week to 13 December from a year earlier after gaining 6.84% the previous week, the commerce ministry said in New Delhi on Friday. That matched the median estimate of 17 economists surveyed by ‘Bloomberg’.

Inflation in India has fallen below the central bank’s 7% fiscal year-end target amid lower fuel costs. Easing prices may allow RBI governor D. Subbarao to cut interest rates for the fourth time in two months and implement the aggressive monetary policy the finance ministry says the country needs to support growth.

Also See Downward Curve (Graphic)

“The declining inflation trend will continue and that gives the Reserve Bank of India enough legroom to cut borrowing costs," said Prasanna Ananthasubramaniam, an analyst in Mumbai at ICICI Securities Ltd. “A further cut in rates will help minimize the downside risks to growth and restore confidence in the markets."

India’s 10-year bonds fell, paring earlier gains, as yields near the lowest level in four-and-a-half years prompted investors to sell the securities.

The yield on the 8.24% note due April 2018 climbed 6 basis points, or 0.06 percentage point, to 5.61% in Mumbai.

The price declined 0.47, or 47 paise per Rs100 face amount, to 118.83.

Slowing inflation has prompted RBI to cut interest rates as economies slow globally. China cut interest rates for the fifth time in three months on 22 December. The Bank of Japan reduced its benchmark rate to 0.1% on 19 December and the US Federal Reserve lowered its main rate to as low as zero on 16 December.

RBI lowered the benchmark repurchase rate by 2.5 percentage points to 6.5% in three cuts from 20 October to 6 December. The bank raised the rate to a seven-year high of 9% in July.

Growth in India, Asia’s third largest economy, may slow to 7% in the year ending 31 March from 9% or more in the previous three years, according to the government, which on 7 December announced a Rs20,000 crore stimulus package to revive spending.

The Fuel Price Index in the week to 13 December fell 0.18% from a year earlier, Friday’s report showed. Prices of manufactured goods, including cooking oil, iron, steel and chemicals, rose 7%, slower than the 7.3% gain in the previous week.

Friday’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 18 October to 10.82% from 10.68%.

Graphics by Paras Jain / Mint