India Inflation Slows to 2-Decade Low; Gives Scope for Rate Cut

March 19 (Bloomberg) -- India's inflation slowed to a two- decade low, providing room for the central bank to cut interest rates to protect the economy from the global recession.

Wholesale prices rose 0.44 percent in the week to March 7 from a year earlier after gaining 2.43 percent the previous week, the commerce ministry said in New Delhi. That's the lowest inflation rate on record, according to data available since 1990 on Bloomberg. Economists expected an increase of 0.86 percent.

"Inflation will turn negative starting from April and will remain so until the end of 2009," said Tushar Poddar, an economist with Goldman Sachs Inc. in Mumbai. "We expect the Reserve Bank to ease liquidity" to support growth.

The International Monetary Fund said this week India should rely more on monetary policy to support the economy as high public debt makes fiscal efforts difficult. Growth won't be hurt by deflation and any negative trend in prices will not be sustained for long, the finance ministry's top economist Arvind Virmani told Bloomberg News this week.

Governor Duvvuri Subbarao on March 4 cut the Reserve Bank of India's key repurchase rate to an all-time low of 5 percent, having reduced the measure by 400 basis points since October. Still, India has more room to lower rates than other economies, with the Bank of England's benchmark at 0.5 percent and the U.S. Fed's target interest-rate range at 0 percent to 0.25 percent.

Budget Deficit

Prime Minister Manmohan Singh's tax cuts and extra spending plans will widen the budget deficit to 6 percent of gross domestic product in the year ending March 31 from a target of 2.5 percent. That will force the government to borrow a record 3.62 trillion rupees ($71 billion) next year. Indian government debt is the equivalent of 80 percent of the nation's GDP.

The global recession has caused a decline in the cost of energy and commodities, slowing inflation across the Asia- Pacific region. Consumer prices in China fell 1.6 percent in February from a year earlier, the first decline since 2002, and wholesale prices in Japan tumbled 1.1 percent in the same month, raising the risk of deflation in the region's biggest economies.

The decline in wholesale-price inflation in India is "good but one should not be euphoric about it as long as consumer- price inflation is still running at above historic levels," Virmani said in an interview on March 18.

India has four separate measures to gauge consumer prices and they haven't moved in tandem with the wholesale price trend. Food prices have about 70 percent weight in India'a consumer price indices.

Consumer Prices

Inflation as measured by the consumer prices paid by industrial workers quickened to 10.45 percent in January, the highest since December 1998. The consumer-price index for farm workers increased 11.62 percent in January from a year earlier, following an 11.14 percent gain in December.

The central bank said this month consumer prices will decline after a lag, without specifying a time frame.

Today's inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry today revised the rate for the week to Jan. 10 to 5.46 percent from 5.60 percent.

To contact the reporters on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net Kartik Goyal in New Delhi at kgoyal @bloomberg.net.