By Kartik Goyal
Nov. 20 (Bloomberg) -- India's inflation unexpectedly slowed to a five-month low, giving the central bank room to reduce borrowing costs to shore up a slowing economy. Bonds rose.
Wholesale prices rose 8.9 percent in the week to Nov. 8 from a year earlier after gaining 8.98 percent in the previous week, the commerce ministry said in New Delhi today. That was less than the median forecast of 9 percent in a Bloomberg News survey of 13 economists. The inflation rate has dropped from a 16-year high of 12.91 percent in the week to Aug. 2.
The Reserve Bank of India has scope to cut borrowing costs further as inflation approaches a level ``we can live with,'' Finance Minister Palaniappan Chidambaram said in a Nov. 18 interview. Growth in India's $1.2 trillion economy is weakening as a simultaneous recession in the U.S., Europe and Japan crimp demand for the nation's exports.
``The slowdown in inflation gives a great deal of comfort to the Reserve Bank to move ahead in cutting interest rates and to give a push to the growth momentum,'' said Shubhada Rao, an economist at YES Bank Ltd. in Mumbai. ``There is a clear shift in focus.''
Bonds extended gains after the inflation report. The yield on the benchmark 10-year note fell to 7.23 percent, the lowest since January 2006, from 7.25 percent earlier. The price rose 1.3 per 100 rupee face amount to 106.92.
`Constant Vigil'
Prime Minister Manmohan Singh on Nov. 17 reviewed India's ``liquidity situation'' in a meeting attended by central bank Governor Duvvuri Subbarao and ``advised him to keep a very close and constant vigil over the situation and act as appropriate,'' Chidabmaram said.
The central bank has cut its benchmark lending rate twice in the past month, lowering it to 7.5 percent from a seven-year high of 9 percent. It also pared the amount lenders must set aside as reserves to cover deposits by 3.5 percentage points in a month, freeing up as much as 1.4 trillion rupees ($29.5 billion) in cash to ease lending.
The wholesale price index fell in the week to Nov. 8 because of a decline in the prices of fuel products such as jet fuel, furnace oil and naphtha. The oil index fell after Indian oil companies including Indian Oil Corp., the nation's largest refiner, cut the price of jet fuel by 4 percent.
The index of manufactured products that includes cooking oil and steel products, with a 63.7 percent weighting in the inflation basket, dropped to about 1 percent in the week, today's report showed.
Declining oil and commodity prices are cooling inflation across Asia, providing policy makers with scope to reduce borrowing costs to stimulate growth. Crude oil have fallen by 64 percent after climbing above $147 a barrel for the first time in July, while corn and wheat prices are also down by more than half from records reached earlier this year.
Today'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 Sept. 13 to 12.42 percent from 12.14 percent.
To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal
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