Feb. 26 (Bloomberg) -- India’s inflation slowed to a 14- month low amid weaker economic growth, making it more likely the central bank will cut interest rates. Bonds rose.

Wholesale prices climbed 3.36 percent in the week to Feb. 14 from a year earlier after rising 3.92 percent the previous week, the commerce ministry said in New Delhi today. Economists expected an increase of 3.38 percent.

Bonds gained on speculation the central bank may lower interest rates for a fifth time since October. Finance Minister Pranab Mukherjee yesterday said he was sure the Reserve Bank of India would take “appropriate compensatory” action after the government this week cut taxes on consumer goods and services to spur the economy, expected to grow at the slowest pace since 2003.

“The sharper-than-expected slide in inflation and demand leaves little ambiguity that the Reserve Bank will cut rates,” said Dharmakirti Joshi, an economist at Mumbai-based Crisil Ltd., the local unit of Standard & Poor’s. Joshi expects the central bank to reduce borrowing costs by between 50 to 100 basis points.

The yield on the benchmark 8.24 percent note due April 2018 fell 2 basis points to 6.56 percent from 6.58 percent immediately before the report. A basis point is 0.01 percentage point.

To help revive demand and arrest a decline in industrial production, India’s government on Feb. 24 lowered the excise duty to 8 percent from 10 percent and reduced the service tax to 10 percent from 12 percent. A 4 percentage point cut in central value-added tax announced in December was also extended beyond March 31, 2009.

‘Loose’ Policy

India’s central bank kept interest rates unchanged in its scheduled policy review on Jan. 27 after reducing them to an unprecedented low on Jan. 2. The repurchase rate, which has been cut four times since October, is at 5.5 percent and the reverse repurchase rate is 4 percent.

“Inflation has markedly decelerated in recent weeks, and interest rates must follow suit to maintain a loose monetary policy stance,” said Sherman Chan, an economist at Moody’s Economy.com in Sydney. “It is time for the Reserve Bank to join in again in reviving the economy.”

Slowing demand in Asia’s third-largest economy is reflected in declining industrial output and falling overseas orders. Industrial production tumbled 2 percent in December, the biggest fall in almost 16 years, and exports declined for the fourth straight month in January.

Slower Growth

That may weaken growth in the $1.2 trillion economy in the October-to-December quarter, figures for which will be released tomorrow. India economy grew 7.6 percent in previous quarter.

The fuel price index fell 3.98 percent in the week to Feb. 14, from a decline of 3.03 percent in the previous week, today’s report showed. Manufactured price inflation, with 64 percent weight in the inflation basket, rose 4.67 percent in the week from 4.94 percent a week ago.

Prices of fruits, vegetables, spices, edible oils, chemicals and metals declined in the week.

Today’s inflation rate may be revised in two months, after the government receives additional price data. The commerce ministry today revised the inflation rate for the week to Dec. 20 to 5.91 percent from 6.38 percent.

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

Last Updated: February 26, 2009 01:49 EST