26 Mar 2009
March 26 (Bloomberg) -- India's inflation slowed to 0.27 percent, giving the central bank more room to cut interest rates and prop up an economy growing at the weakest pace in six years.The increase in wholesale prices in the week to March 14 from a year earlier followed a gain of 0.44 percent the previous week, the commerce ministry said in New Delhi. That's the lowest inflation rate on record, according to data available since 1990 on Bloomberg. Economists expected an increase of 0.12 percent.
The finance ministry's top economist Arvind Virmani earlier this month ruled out the possibility that India will suffer from deflation. While the wholesale index is the Asian nation's benchmark measure for prices, India has four consumer-price indices that are running at more than 7 percent.
"Talk of deflation in India is misplaced when consumer prices are still very high," said Rajeev Malik, a regional economist at Macquarie Group Ltd. in Singapore. "Negative prints on wholesale prices and weak economic activity may prompt the central bank to ease policy rates further."
India's inflation based on consumer prices paid by industrial workers stood at 10.4 percent in January. The consumer-price index for farm workers gained 11.62 percent in the same month, according to government data.
The Reserve Bank of India uses the wholesale price index as the benchmark because the consumer price indices don't capture the aggregate price picture, unlike in other countries, said Malik. India's statistics department said last year it is working on a plan to build a comprehensive consumer price index to use as the benchmark.
‘Still Firm'
"We expect the wholesale price index readings to be negative for around two quarters," said Sonal Varma, a Mumbai- based economist at Nomura International Ltd. "But do not confuse this with deflation. Consumer prices are still firm though we expect it to moderate with a lag to about 4 percent by the fourth quarter of this year."
Varma expects the central bank to cut its repurchase and reverse repurchase rates by 100 basis points to 4 percent and 2.5 percent respectively by the middle of 2009. A basis point is 0.01 percentage point.
Governor Duvvuri Subbarao has cut the repurchase rate by 400 basis points since October. India has more room to lower rates than other economies, with the Bank of England's benchmark at 0.5 percent and the U.S. Fed's target interest-rate range at 0 percent to 0.25 percent.
Sustained Decline
Deflation is a sustained decline in prices that may encourage consumers to delay spending, hurting economic growth.
China last month suffered its first deflation since 2002, joining Ireland, Taiwan and Thailand in recording record falling prices in their most recent figures, according to Bloomberg News data covering 78 countries.
India's $1.2 trillion economy may grow around 6.5 percent in the year ending March 31, the nation's Planning Commission Deputy Chairman Montek Singh Ahluwalia said this week.
Prime Minister Manmohan Singh said March 24 that growth will rebound strongly in about six months on the back of rural demand. Agriculture has expanded at an unprecedented 4.4 percent average annual pace since 2004, providing village dwellers with more money to spend.
