Inflation slowing as expected, says Indian finance minister

Mumbai: 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.

Wholesale prices rose 11.07 per cent in the week to October 11 from a year earlier after gaining 11.44 per cent in the previous week, the commerce ministry said in a statement in New Delhi yesterday. Economists had expected an 11.35 per cent 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, signalling a shift in focus as lower commodity prices ease pressure on inflation. Fin-ance Minister Palaniappan Chidambaram said the rate cut was "to stimulate the economy even while we continue to pay attention to inflation".

Policy statement today

"Inflation concerns are receding,'' said Mridul Saggar, chief economist at Kotak Securities Ltd in Mumbai. "The Reserve Bank is right in changing its stance to support growth.'' He expects inflation to slow to near 6 per cent by March 31.

India's central bank on October 20 unexpectedly cut its repurchase rate by 1 percentage point to 8 per cent. 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 today.

"The moderation in crude oil prices and the moderation in commodity prices will have a beneficial effect on the headline inflation and that's what's happening,'' Chidambaram told reporters in New Delhi yesterday. Crude oil costs have more than halved since rising to a record $147.27 on July 11.

"The Reserve Bank of India stands ready to respond quickly to address the emerging needs of our economy,'' Prime Minister Manmohan Singh said yesterday in Japan. The $1.2 trillion economy will grow at a slower pace this year because of the global financial crisis, Singh said.

India's economy grew 7.9 per cent 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 per cent in the fiscal year to March 2009, the slowest pace in four years.

Crisis of Confidence

"The crisis has choked credit flows and predictably spilled over to the stock market,'' Prime Minister Singh said. "We have to prevent the liquidity crisis from becoming a crisis of confidence.''

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 per cent 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 August 16 to 12.82 per cent from 12.4 per cent.