May 21 (Bloomberg) -- India’s inflation held near a three- decade low, giving Prime Minister Manmohan Singh’s re-elected government room to take steps to support a slowing economy.

Wholesale prices rose 0.61 percent in the week to May 9 from a year earlier after gaining 0.48 percent in the previous week, the government said in New Delhi today. That matched the median forecast in a Bloomberg News survey of economists.

Singh will form India’s next government this week after an alliance led by his Congress party won a second five-year term. An important challenge for the new administration will be to open up the economy and revive growth that’s slowed to the weakest pace since 2003, Singh told lawmakers on May 19.

“Inflation is not a primary concern at this point of time and that gives policy makers leeway to focus on policies that will help stimulate slowing demand,” said Sonal Varma, a Mumbai-based economist with Nomura Securities Co. “While inflation can post negative readings, this cannot be characterized as deflation.”

Bonds extended declines after the inflation data. The yield on the 6.05 percent note due February 2019 rose to 6.40 percent as of 12:08 p.m. in Mumbai from 6.39 percent earlier, according to the central bank’s trading system.

Wholesale prices may decline for a few weeks in the coming months, though that doesn’t mean India is in the grip of deflation, central bank Governor Duvvuri Subbarao said last week. Inflation in India has held below 1 percent for two months, after reaching a 16-year high of 12.91 percent last August.

Interest Rates

Slower inflation enabled the central bank to slash interest rates six times since October, last lowering the key reverse repurchase rate by a quarter-point to 3.25 percent on April 21.

The Reserve Bank of India looks at other inflation gauges beside the wholesale price index when deciding its monetary stance, according to Governor Subbarao.

Consumer prices paid by industrial workers rose 8.03 percent in March from a year earlier, after gaining 9.63 percent the previous month, according to government data.

India has four consumer price indices and uses the wholesale price index as the benchmark measure as the other inflation gauges don’t capture the aggregate price picture.

Manufactured price inflation, accounting for about 64 percent of the inflation basket, rose 1.14 percent in the week from a year earlier, compared with a 1 percent gain in the previous week, today’s report showed. Prices of fruits, vegetables, cooking oil, spices and textiles also increased.

Lower interest rates combined with tax cuts and government spending provide a stimulus of more than $85 billion, or 7 percent of gross domestic product, according to central bank estimates. That may help economic growth recover to 6 percent in the year that started April 1, from 5.3 percent in the quarter ended Dec. 31, Subbarao said April 21.

India’s wholesale-inflation rate published today may be revised in two months, after the government receives additional price data. The commerce ministry today revised the rate for the week ended March 14 to 0.71 percent from 0.27 percent.

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

Last Updated: May 21, 2009 02:48 EDT