India Inflation at 13-Month Low, Rate Cut More Likely

By Kartik Goyal

Feb. 19 (Bloomberg) -- India’s inflation slowed to a 13- month low, increasing chances the central bank may cut interest rates to support a weakening economy. Bonds rose.

Wholesale prices climbed 3.92 percent in the first week of February from a year earlier after gaining 4.39 percent the previous week, the commerce ministry said in New Delhi today. Economists expected an increase of 4.01 percent.

Reserve Bank of India Governor Duvvuri Subbarao yesterday said there was “certainly room” to reduce borrowing costs as the impact of the global recession on Asia’s third-largest economy had been “much sharper” than expected. Inflation has eased from a 16-year high of 12.91 percent in August on lower commodity and energy prices.

“The rapid fall in inflation is providing the central bank with additional headroom for further monetary accommodation,” said Siddhartha Sanyal, an economist with Edelweiss Capital Ltd. in Mumbai. “The weakening real economy and bulging government borrowing are making the case for further cuts in policy interest rates stronger.”

Bonds rose after the inflation data slowed more than economists expected. The yield on the 8.24 percent bond declined 2 basis points to 6.29 percent as of 11:54 a.m. in Mumbai, from 6.31 percent before the report.

Rate Cuts

India’s central bank kept interest rates unchanged in its scheduled policy review on Jan. 27 after reducing them to an unprecedented low on Jan. 2. The repurchase rate, which has been cut four times since October, is at 5.5 percent and the reverse repurchase rate is 4 percent.

“We expect a reduction in key policy rates by 50 basis points each in February itself,” Sanyal said.

Inflation in India is slowing due to cheaper fuel costs. The government reduced retail fuel prices on Jan. 28 for the second time in less than two months amid a slump in crude oil prices. The index of energy products fell 3.03 percent in the week, today’s report showed while the manufacturing products inflation slowed to 4.94 percent from a gain of 5.52 percent in the previous week.

The $1.2 trillion Indian economy is likely to expand 7.1 percent in the 12 months to March 31, the government said Feb. 9. That would be the slowest pace of expansion in six years and follows annual average growth of more than 9 percent in the previous three years.

Today’s inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry today revised the inflation rate for the week to Dec. 13 to 6.24 percent from 6.61 percent.

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