India's Inflation Rate Cools to Six-Month Low, Adds to Case for Rate Pause

India’s inflation cooled to a six- month low in July, providing Governor Duvvuri Subbarao room to temper the pace of monetary tightening after four interest-rate increases in five months. Bonds gained.

The benchmark wholesale-price index rose 9.97 percent from a year earlier, after a 10.55 percent gain in June, the commerce and industry ministry said in a statement in New Delhi today. The median estimate of 21 economists in a Bloomberg News survey was for a 10.4 percent jump.

The data comes after India’s industrial output expanded at the weakest pace in 13 months, allowing Subbarao to gauge the impact of the most aggressive rate increases in Asia. A faltering global recovery may also hamper India’s growth, with a report today showing Japan’s economy expanded last quarter at less than a fifth of the pace economists estimated.

“The Reserve Bank of India will be thinking a lot more before hiking rates now,” said Samiran Chakraborty, a Mumbai- based economist at Standard Chartered Plc.

Ten-year government bond yields declined four basis points from the day’s high to 7.81 percent at 3 p.m. in Mumbai. The Bombay Stock Exchange’s Sensitive Index fell 0.6 percent while the rupee dropped 0.2 percent to 46.86.

Policy Action

Subbarao on July 27 boosted the reverse repurchase rate by half a point to 4.5 percent and the repurchase rate to 5.75 percent from 5.5 percent. The central bank’s next monetary policy announcement is on Sept. 16. Chakraborty sees a half- point increase in rates by March 31.

“There is a moderation in the rate of inflation underway now and it will become quite comfortable by December,” Montek Singh Ahluwalia, deputy chairman of the Planning Commission, told reporters in New Delhi today. “The movement is in line with what we have been arguing.” He expects inflation to ease to 6 percent by December.

The inflation reading for May was raised to 11.14 percent from 10.16 percent, according to today’s statement.

Inflation is slowing because of a decline in food costs, which are making up for higher fuel prices, according to Dharmakirti Joshi, chief economist at Crisil Ltd., the Indian unit of Standard and Poor’s.

The food inflation rate has almost halved to 11.4 percent since November as the country received more rainfall than forecast, aiding sowing of lentils and rice.

Monsoon Rains

Rains in July, the wettest month of the June-September monsoon season, were 102.5 percent of the 50-year average of 292.4 millimeters, according to the India Meteorological Department. Monsoon rains are the main source of irrigation in India.

Prime Minister Manmohan Singh on June 25 allowed state-run refiners including Indian Oil Corp. to increase gasoline and diesel prices. The finance ministry estimated the move may boost the inflation rate by about a percentage point.

The results of the central bank’s policy actions will be visible over the next few months as such measures usually act with a lag, Deputy Governor Subir Gokarn said Aug. 12.

The prospect of a decline in food costs gives Subbarao room to assess the implications on growth in India, Asia’s biggest economy after Japan and China, said Indranil Pan, chief economist at Kotak Mahindra Bank Ltd. in Mumbai.

India’s industrial production rose 7.1 percent in June after an 11.3 percent gain in May from a year earlier, the statistics department said on Aug. 12.

Japan’s economy grew an annualized 0.4 percent last quarter, pushing it into third place behind the U.S. and China and adding to evidence the global recovery is faltering.

The announcement came after China reported weaker factory output data last week and the Federal Reserve reversed plans to exit from its aggressive monetary stimulus.

“Now we have gone back to the arguments of a global slowdown,” Kotak’s Pan said. “India is almost there in terms of end of the rate hike cycle.”

To contact the reporter on this story: Unni Krishnan in New Delhi at ukrishnan2@bloomberg.net.

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