India’s Inflation Rate Declines to Nine-Month Low

By Kartik Goyal

Dec. 18 (Bloomberg) -- India’s inflation rate fell to the lowest since early March as demand slowed amid the global economic meltdown and a drop in crude oil costs led the government to cut retail fuel prices.

Wholesale prices increased 6.84 percent in the week to Dec. 6 from a year earlier after gaining 8 percent the previous week, the commerce ministry said in New Delhi today. Economists expected an increase of 7.49 percent.

Bonds rose amid speculation that slowing inflation will give the central bank room to add to three interest-rate cuts in the past two months as growth falters. India’s monetary policy should have been “more aggressive” to counter the impact of the global financial crisis, Arvind Virmani, the finance ministry’s chief economic adviser said yesterday.

“There is a massive downside risk to economic growth and that is the reason for a turnaround in monetary policy” after three years of tightening, said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor’s. “We expect the Reserve Bank to reduce the repurchase rate by another 100 basis points.”

India’s 10-year bonds extended gains after the inflation report, pushing yields to a 4 1/2-year low of 5.54 percent as of 12:02 p.m. in Mumbai.

Governor Duvvuri Subbarao, a little more than three months into the job, has reversed his predecessor’s monetary tightening to protect the economy, forecast to expand at its weakest pace since 2003 in the current fiscal year.

Stimulus Package

The Reserve Bank of India on Dec. 6 cut its benchmark repurchase rate to 6.5 percent from 7.5 percent. The following day, the government announced a $4 billion stimulus package to revive spending, including lower taxes on consumer goods like cars, television screens and motorbikes.

India on Dec. 5 cut gasoline prices by 5 rupees (11 U.S. cents) a liter and diesel by 2 rupees a liter. Crude oil prices have tumbled 73 percent from a record $147.27 on July 11.

South Asia’s biggest economy may grow 7 percent in the year ending March 31 after expanding 9 percent or more annually in the previous three years, as the global slump hurts exports, according to the government.

Inflation in the week to Dec. 6 slowed as the fuel-price index fell 3.7 percent from the previous week, today’s report showed. Prices of manufactured goods, including cooking oil, iron, steel and chemicals, fell 0.3 percent.

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 Oct. 11 to 11.3 percent from 11.07 percent.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal @bloomberg.net.