India's inflation lowest in more than five years

New Delhi: India's inflation rate fell below three per cent for the first time in more than five years after the government refrained from raising fuel prices this year, when crude oil rallied to a record.

Wholesale prices rose 2.97 per cent in the week ended October 27 from a year earlier compared with a 3.02 per cent gain in the previous week, the Ministry of Commerce and Industry said yesterday. Analysts had forecast inflation at 3.06 per cent.

Capping fuel prices will cost the government about $12 billion in the two years ending March 31, equal to almost a tenth of India's annual budget. India may next week allow the first increase in fuel prices this year, letting state-run refiners to partly pass on the record rise in crude oil costs to consumers, Oil Minister Murli Deora said.

'Too early'

"The inflation rate will be higher by 1.5 percentage points if the entire increase in oil prices is allowed to be passed through into the economy,'' said Robert Prior-Wandesforde, senior Asian economist at HSBC Group in Singapore. "It is too early to say interest rates have peaked in India.''

The benchmark 10-year government bond yield was unchanged after the inflation data was announced. The yield on the 7.99 per cent bond due July 2017 held at 7.91 per cent.

India hasn't allowed refiners to raise prices this year on concern it will accelerate inflation before state and national elections.

Reserve Bank of India Governor Yaga Venugopal Reddy, while maintaining its policy rates at a five-and-a-half year high last week, described the current inflation rate as "suppressed'' because it does not reflect the rise in oil price to records.

Central bank action

India's central bank Oct-ober 30 unexpectedly ordered lenders to set aside more reserves for the fourth time this year to contain inflation. Reddy reiterated the bank aims to contain inflation below five per cent by March 31.

Refiners, including Indian Oil, the country's big-gest, had sought a 15 per cent rise in diesel prices and 6.7 per cent in gasoline in early September when oil process averaged $75.3 a barrel. Crude oil prices have risen 52 per cent this year, inching close to $100 a barrel.

China on November 1 unexpectedly increased fuel prices by as much as 10 per cent in an "urgent step'' to help the nation's oil refiners cover surging crude costs.