Business | Economy
Rates cut validated as inflation stays near five-month low in India
India's inflation held near a five-month low, validating the central bank's decision to reduce interest rates to bolster economic growth.
- Bloomberg
- Published: 23:22 November 6, 2008
New Delhi: India's inflation held near a five-month low, validating the central bank's decision to reduce interest rates to bolster economic growth.
Wholesale prices rose 10.72 per cent in the week to October 25 from a year earlier after gaining 10.68 per cent in the previous week, the commerce ministry said in a statement in New Delhi yesterday. Economists had expected a 10.49 per cent increase.
The Reserve Bank of India unexpectedly cut its benchmark rate on November 1 for the second time in two weeks, joining policymakers across Asia in lowering borrowing costs to shield their economies from the global financial crisis.
Governor Duvvuri Subbarao may reduce interest rates further as declining fuel and food costs ease price pressures, econ-omists said.
"The Reserve Bank's policy signals inflation is no longer a concern and the focus has shifted to lifting the economy," said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor's. Declines in energy and commodity prices will further slow inflation to between 5.5 per cent and 6 per cent by March 2009, he said.
For the first time since 1997, India's central bank on November 1 deployed all three of its main tools to shore up growth after inter-bank lending rates climbed to as much as 21 per cent. That's improved liquidity in the financial system, with overnight call rates falling to 6.25 per cent today.
Curbing exports
Bonds pared gains after the release of the inflation data. The yield on the benchmark 8.24 per cent note due April 2018 rose to 7.72 per cent from 7.70 per cent at 3.11pm in Mumbai, according to the central bank's trading system.
The global financial crisis is curbing exports and output across Asia, prompting central banks to cut interest rates. Australia reduced its key rate by three quarters of a percentage point to 5.25 per cent on November 4. China lowered its one-year lending rate to 6.66 per cent from 6.93 per cent on October 29.
"We are able to act more boldly because our efforts to contain inflation have begun to be effective," Prime Minister Manmohan Singh said November 3. "Movements in the wholesale-price index over the past six weeks suggest a definite abatement of inflationary process."
India's central bank on October 24 reduced its growth forecast to as low as 7.5 per cent from 8 per cent in the year to March 31, the slowest pace of expansion in four years.
"The financial crisis has exacerbated a global downturn that was expected earlier but is now likely to be more severe and prolonged," Singh told a meeting of businessmen in New Delhi on November 3.
"A crisis of this magnitude was bound to affect our economy and it has."
The worldwide credit crunch is prompting investors to sell Indian assets, resulting in record net sales of local equities by global funds of $12.5 billion (Dh45.9 billion) this year.
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