Inflation at 13-week low, reducing pressure on rates

Inflation at 13-week low, reducing pressure on rates

New Delhi: Inflation slowed more than expected to a 13-week low, giving the central bank room to keep interest rates unchanged when it meets at the end of the month.

Wholesale prices rose 11.99% in the week to 20 September from a year earlier after gaining 12.14% in the previous week, the commerce ministry said in a statement in New Delhi on Friday. Economists expected a 12.12% increase.

Reserve Bank of India governor D. Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao is unlikely to yield as inflation is still double the central bank’s target. “Inflation is still at elevated levels," said N.R. Bhanumurthy, an economist at Institute of Economic Growth in New Delhi. “Cuts in interest rates will come, but just not yet."

The central bank has raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9% since December 2006 to contain inflation. The bank will release its next monetary policy statement in Mumbai on 24 October.

The rate at which Indian banks lend to each other climbed to an 18-month high of 17.5% on 1 October as investors hoarded cash amid concern the US financial meltdown could tip the global economy into recession.

Indian banks borrowed an average Rs41,300 crore a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system.