Hope of rate cuts as India inflation at two-year low

The plunging value of the rupee is pushing up the cost of fuel, imports and manufactured products. Photo / AP

India's inflation fell to a two-year low of 7.47 per cent in December, data showed yesterday, in a potential turning point that raises hopes of future interest-rate cuts.

It was the lowest reading of the Wholesale Price Index since December 2009, and the first time since December 2010 that inflation has dropped below 9 per cent.

The WPI has been nudging double digits for the last six months, fuelled by surging food prices which have heaped misery on India's hundreds of millions of poor and caused political difficulties for the Government.

The Reserve Bank of India has raised interest rates 13 times since March 2010 in a bid to bring down inflation, putting a dampener on industrial activity and slowing economic growth.

While the RBI is not seen as likely to change its stance at a meeting next week, if inflation continues on a downward trajectory - as forecast by the Government - the bank has signalled it is ready to cut.

"Food prices are driving down inflation but we do not expect the RBI to immediately cut rates as core inflation is still high," said Siddartha Sanyal, chief India economist with Barclays Capital in Mumbai.

The inflation reading, down from 9.11 per cent in November, was broadly in line with predictions by analysts.

In the week ended December 24, food prices fell by 3.36 per cent from a year earlier - the first drop in six years, according to analysts.

RBI governor Duvvuri Subbarao said in December at the bank's last policy meeting that "from this point on, monetary policy actions are likely to reverse the cycle [of increasing rates]".

Economic growth in India has slowed sharply in recent months and is expected to be about 7 per cent for the financial year to March, a low figure by recent Indian standards.

Industry figures have been highly critical of the central bank's aggressive moves to raise the cost of borrowing.

Most analysts predicted interest rates would be kept on hold and that the data, while reassuring, would be insufficient to spark a change in thinking at the central bank.

"Today's data alters our interest-rate outlook slightly," said Glenn Levine, senior economist at ratings agency Moody's, who predicted that the data may give the RBI sufficient reason to cut rates before March.

Levine, who had predicted rate cuts only in March, added in a note to clients: "From here, we expect inflation to cool in the coming months."

Prices of manufactured products are also still high, rising 7.41 per cent in December from a year earlier.

The rupee - Asia's worst-performing currency last year after it lost more than 20 per cent of its value against the US dollar - remains weak, making imports costlier and increasing pressure on inflation.

Sonal Varma, India economist with Nomura Securities, said that she expected headline inflation to remain near 7 per cent between now and March. "But rupee depreciation is a risk to this view," she said.

India's Finance Minister, Pranab Mukherjee, told reporters in New Delhi that he expected headline inflation to moderate to between 6 per cent and 7 per cent by the end of the current financial year on March 31.

Better industrial production numbers for November and a decline in inflation indicated some improvement in economic prospects for the second half of 2011-12, he added.

- AAP