India inflation falls to three year low

NEW DELHI - Reuters

The facade of the Reserve Bank of India (RBI) head office is pictured in Mumbai.

India’s headline inflation slowed to its lowest level in three years, hardening expectations for an interest rate cut by the central bank later this month to boost an economy that is set to post its slowest growth in a decade.

The wholesale price index (WPI), India’s main inflation indicator, rose an annual 7.18 percent in December 2012, the slowest since December 2009 and below analysts’ forecast of 7.4 percent rise in a Reuters poll, as wholesale prices rose 7.24 percent in November. The better-than-expected inflation data left most analysts debating not whether the Reserve Bank of India (RBI) would cut interest rates at its policy review on Jan. 29, but by how much. The probability of a rate cut in January-end has increased, said Abheek Barua, chief economist at HDFC Bank in New Delhi, adding that the next question was whether it would be 25 basis points or higher.

Following the inflation data, financial markets rallied in anticipation of an early rate cut. India’s 10-year bond yield fell to its lowest in 29 months. The rupee strengthened against the dollar, while swap rates fell.

The slowdown in the headline inflation was led by a moderation in the prices of fuel and manufactured goods. The annual reading for last October was revised down to 7.32 percent from 7.45 percent, the government said in a release yesterday. And a drop in non-manufacturing inflation, used by the RBI to gauge demand-driven price pressures, to 4.2 percent in December 2012 from 4.5 percent a month ago further bolstered hopes for the long-awaited cut. Last month, amid mounting calls from politicians and industry for a lower borrowing rates, the RBI signalled a possible reduction in the January-March quarter.

The policy repo rate has remained unchanged at 8 percent since April 2011, putting India’s interest rates among the highest of the major economies