India Wholesale-Inflation Rate Holds Near 27-Year Low

April 23 (Bloomberg) -- India's inflation held near a 27- year low, suggesting the central bank's six interest-rate cuts since October may help spur growth without rekindling inflation.

Wholesale prices rose 0.26 percent in the week to April 11 from a year earlier after gaining 0.18 percent the previous week, the commerce ministry said in New Delhi today. That was more than 0.10 percent increased expected by 21 economists in a Bloomberg News survey.

The wholesale price index may turn negative in the next few months though that shouldn't be interpreted as deflation as consumer-price gains continue to run at near double-digits, according to central bank Governor Duvvuri Subbarao. The Reserve Bank of India this week cut borrowing costs to a record low to bolster an economy growing at the weakest pace since 2003.

"The sharp deceleration of wholesale price growth is a clear indication that inflationary pressures have evaporated and the Reserve Bank should now focus more on reviving economic growth," said Sherman Chan, an economist at Moody's Economy.com in Sydney. "I expect the central bank to maintain a loosening bias in the coming months."

The yield on the 6.05 percent note due 2019 rose to 6.20 as of 12:10 p.m. in Mumbai, from 6.19 percent immediately before the report, according to the central bank's trading system.

Inflation in South Asia's largest economy has eased since surging last August to a 16-year high of 12.91 percent amid soaring commodity costs.

Interest Rates

India's average annual inflation rate was zero percent in the fiscal year 1978-79 and prices declined by 1.1 percent in the year 1975-76, according to older central bank data that doesn't provide a weekly breakdown.

Governor Subbarao on April 21 reduced the central bank's reverse repurchase rate and the repurchase rate by a quarter point each to 3.25 percent and 4.75 percent respectively, dropping them to the lowest since they were introduced in 2000.

Slowing inflation is enabling policy makers across South Asia to cut interest rates and fight the impact of the worst global recession since World War II. Sri Lanka yesterday reduced its repurchase rate to 9 percent from 10.25 percent after Pakistan on April 20 lowered its benchmark interest rate for the first time since 2002.

India's central bank in its annual policy announcement on April 21 said any decline in wholesale prices may not persist beyond the middle of the fiscal year that started April 1 and that inflation may reach 4 percent by next March. The bank also expects consumer-price inflation to slow in the coming weeks.

Farm Workers

Consumer prices paid by industrial workers rose 9.63 percent in February from a year earlier, after gaining 10.45 percent the previous month, according to government data. Consumer-price inflation for farm workers was 10.79 percent in the same period.

The inflation rate rose in the week to April 11 as the manufactured price index, accounting for 63.75 percent of the inflation basket, increased 0.9 percent from a year earlier after gaining 0.75 percent in the previous week. Prices of vegetables, fruits, cereals, sugar, salt and cooking oil rose in the week, today's report showed.

India's $1.2 trillion economy is forecast by the central bank to expand by 6 percent in the fiscal year that started April 1, the slowest pace since 2003, after estimated growth of 6.5 percent to 6.7 percent in the previous year. The economy expanded 5.3 percent in the December quarter from a year earlier.

'Greater Concern'

"With little prospect of an imminent economic recovery, we expect to see the central bank cut rates again, probably after the general election," said Robert Prior-Wandesforde, an economist at HSBC Holdings Plc in Singapore. The Reserve Bank's actions "indicate that the growth outlook remains of greater concern than inflation."

India is holding national elections that started on April 16 and will continue until May 13, with counting of ballots due to be held on May 16. Most opinion polls say Prime Minister Manmohan Singh's Congress party may emerge with most seats, though it may have to rope in new allies to secure a majority in the legislature.

To contact the reporter on this story: Kartik Goyal in New Delhi at kgoyal@bloomberg.net .