More room for rate cuts as inflation hits 20-year low

More room for rate cuts as inflation hits 20-year low

New Delhi: India’s inflation slowed to a 20-year low in the first week of April, giving the central bank room to cut interest rates further next week.

Wholesale prices rose 0.18% in the week to 4 April from a year earlier after gaining 0.26% the previous week, the commerce ministry said in New Delhi on Thursday. That’s the lowest inflation rate on record, according to Bloomberg data going back to January 1990. Economists expected a fall of 0.13%. Central bank governor D. Subbarao says slowing inflation is an “advantage" that may help stoke consumer demand and reduce costs for businesses. The Reserve Bank of India (RBI), which has cut interest rates five times since October, is next due to review its policy on 21 April in Mumbai.

Also See Decline Continues (Graphic)

Wholesale price inflation near zero is a temporary statistical phenomenon that should not be construed as deflation as consumer price gains remain high, said economists including Dharmakirti Joshi.

“There is absolutely no evidence of a deflationary cycle in India," said Joshi, a Mumbai-based economist at Crisil Ltd, the local unit of Standard and Poor’s. “Demand remains strong and the negative trend may not continue beyond a few weeks."

The yield on the 6.05% note due February 2019 slid 17 basis points to 6.43% at close in Mumbai, according to the central bank’s trading system. The price climbed Rs1.17 per Rs100 face amount to 97.23. One basis point is one-hundredth of a percentage point.

Prime Minister Manmohan Singh this week said RBI has considerable scope to use monetary policy to support economic growth, which he expects will be a “little less" than 7% in the fiscal ended 31 March. That would be the slowest pace of expansion since the 12 months to March 2003.

“The Reserve Bank is expected to continue with its policy of softening interest rates as the downside risks to growth have increased," Joshi said.

Consumer prices paid by industrial workers rose 9.63% in February from a year earlier, after gaining 10.45% the previous month, government data said. Consumer-price inflation for farm workers was 10.79% in the same period. Thursday’s inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry on Thursday revised the rate for the week to 7 February to 3.69% from 3.92%.

Graphics by Paras Jain / Mint

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