India's Inflation Slows

India's inflation slowed more than economists expected to a four-month low, vindicating the central bank's decision this week to cut interest rates to shore up a slowing economy., 10/23/2008 5:26:41 AM

Wholesale prices rose 11.07 percent in the week to Oct. 11 from a year earlier after gaining 11.44 percent in the previous week, the commerce ministry said in a statement in New Delhi today. Economists had expected an 11.35 percent increase.

The Reserve Bank of India this week reduced its key rate to prevent the credit crisis from crimping growth in Asia's third- largest economy, signaling a shift in focus as lower commodity prices ease pressure on inflation. Finance Minister Palaniappan Chidambaram said the rate cut was ``to stimulate the economy even while we continue to pay attention to inflation.''

India's central bank on Oct. 20 unexpectedly cut its repurchase rate by 1 percentage point to 8 percent. It has also reduced the reserve requirement for banks three times this month to prop up growth. The bank's next monetary-policy statement is due to be released in Mumbai on Oct. 24.

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. The central bank expects the economy to expand by 8 percent in the fiscal year to March 2009, the slowest pace in four years.

A shortage of credit, which worsened after the collapse of Lehman Brothers Holdings Inc. last month, is dragging down the global economy. The International Monetary Fund on Oct. 8 forecast that global growth will slow to 3 percent in 2009, from 3.9 percent this year and 5 percent in 2007. That would mean a world recession under the IMF's informal definition.

The global financial crisis is prompting investors to sell Indian assets, resulting in record net sales of local equities by global funds of $12.1 billion this year. That saw the benchmark Bombay Stock Exchange Sensitive Index extend this year's losses to almost 50 percent yesterday.

Sales of local shares have caused the rupee to decline to an all-time low against the dollar, which has offset gains from lower global crude oil prices and increased import costs. The rupee slid to as much as 49.50 per dollar yesterday.

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 Aug. 16 to 12.82 percent from 12.4 percent.