India Inflation Is Under 11%

India's inflation rate fell below 11 percent for the first time since May, giving the central bank room to reduce interest rates., 10/31/2008 9:18:52 AM

Wholesale prices rose 10.68 percent in the week to Oct. 18 from a year earlier after gaining 11.07 percent in the previous week, the commerce ministry said in a statement in New Delhi today. Economists had expected a 10.80 percent increase.

The bigger-than-expected decline in the inflation rate may prompt Reserve Bank of India Governor Duvvuri Subbarao to switch focus to supporting economic growth from controlling inflation amid the threat of a global recession. Subbarao surprised investors on Oct. 24 when he said inflation continues to be a concern for the central bank.

Prices are falling in India because of waning consumer demand and a decline in commodity prices.

India's central bank last week reduced its economic-growth forecast to as low as 7.5 percent from 8 percent in the year to March 31. The Reuters/Jefferies CRB Index of 19 commodities fell 21 percent this month.

Navarro expects the central bank to cut its benchmark repurchase rate by 200 basis points by the end of 2009 along with a 150 basis-point reduction in the cash reserve ratio, or the proportion of deposits lenders need to set aside as reserves.

Subbarao, after consultations with the government, lowered the repurchase rate by 1 percentage point to 8 percent and reduced the cash-reserve ratio by 250 basis points to 6.5 percent this month to cushion Asia's third-largest economy from a global credit crunch.

Still, he followed the policy cuts with a quarterly monetary policy statement on Oct. 24 that aimed to place equal emphasis on controlling inflation and backing economic expansion. The stance caused bonds to decline the most in almost three months and the stock index to fall by 11 percent.

Bonds recovered this week, pushing 10-year yields to the lowest since February, on optimism the central bank will change its policy position and step up efforts to inject funds into the financial system. The stock index has gained 4 percent this week.

Overnight call money rates in India have doubled to 13.5 percent in the past four trading days, indicating there's a shortage of cash in the financial system.

India Inflation Is Under 11%