India's Inflation Holds Near Lowest Level in 5 Weeks

India's inflation held near a five- week low, giving the central bank room to keep borrowing costs unchanged and avoid placing funding pressures on lenders spooked by the U.S. financial meltdown., 9/26/2008 12:25:05 PM

Wholesale prices rose 12.14 percent in the week to Sept. 13 from a year earlier, matching the previous week's gain, the commerce ministry said in New Delhi today.

Weaker-than-expected inflation may allow Reserve Bank of India Governor Duvvuri Subbarao to stop raising interest rates as three increases since June threaten to damp a slowing economy. Some economists including Macquarie Group Ltd.'s Rajeev Malik who previously forecast higher borrowing costs next month now expect the central bank to pause.

India's finance ministry this week allowed companies building roads, ports, utilities and other infrastructure projects to borrow more overseas, giving them access to cheaper funds. The central bank on Sept. 16 also announced measures to boost cash in India's financial system.

The rate at which Indian banks lend to each other climbed to an 18-month high of 15.125 percent on Sept. 19, following the failure of Lehman Brothers Holdings Inc. and the U.S. government takeover of American International Group. The rate declined to 9.75 percent today, according to data compiled by Bloomberg.

The rupee has declined almost 17 percent this year and is the second-worst performer this year among the ten most-active Asian currencies excluding the yen. The rupee fell as the credit-market turmoil in the U.S. prompted overseas funds to pull out money from Indian stocks.

India's central bank in July raised the benchmark interest rate by a half point to a seven-year high of 9 percent after increasing it twice in June. The reserve requirement for lenders was also lifted to 9 percent from 8.75 percent. The Reserve Bank's next policy announcement is due Oct. 24.

The bank expects the $1.2 trillion economy to expand 8 percent in the 12 months ending March, the slowest pace in four years. India's economy grew 7.9 percent in the three months to June 30 from a year earlier, the weakest pace since the last quarter of 2004.

Elevated energy and commodity prices forced the central bank in July to raise its inflation forecast for the year to March 31 to 7 percent from a previous target of between 5 percent and 5.5 percent.

The government may revise today's preliminary wholesale- price estimate in two months after receiving additional data. The commerce ministry today raised its inflation estimate for the week ended July 19 to 12.54 percent from 11.98 percent.