Inflation Slows to Two-Year Low, Reducing Pressure on India Interest Rates

India (INGDPY)’s inflation slowed to the lowest level in two years, giving the central bank scope to keep interest rates on hold for a second straight meeting next week.

The benchmark wholesale-price index rose 7.47 percent in December from a year earlier, the commerce ministry said in a statement in New Delhi today, compared with a 9.11 percent gain in November. The median of 25 estimates in a Bloomberg News survey was for a 7.40 percent gain.

Easing prices may strengthen the ruling Congress party’s bid in state elections starting this month after corruption allegations undermined Prime Minister Manmohan Singh’s coalition in the past year. Inflation in India is still the fastest among BRIC nations including Brazil, Russia and China, crimping the Reserve Bank of India’s room to lower borrowing costs and shield the economy from Europe’s debt crisis.

“This is positive news for the government before elections,” said Rupa Rege Nitsure, a Mumbai-based economist at the state-owned Bank of Baroda. “Inflation will need to drop more before the RBI can cut rates.”

Nitsure expects the central bank to leave the repurchase rate at 8.5 percent in the Jan. 24 policy decision and start reducing it from the end of March.

India’s 10-year bonds declined on speculation the government will exceed its fiscal deficit target, spurring more borrowings from the market. The yield on the 8.79 percent note due November 2021 rose three basis points, or 0.03 percentage point, to 8.22 percent at the close in Mumbai.

Stocks, Rupee

The BSE India Sensitive Index, which lost a quarter of its value last year, gained 0.2 percent. India’s rupee, Asia’s worst-performing currency in 2011, advanced 0.3 percent to 51.39 against the U.S. dollar.

“The recent headline inflation figures indicate some improvement in the overall macro-economic parameters in the second half of 2011-12,” Finance Minister Pranab Mukherjee said in a statement in New Delhi today.

India’s export growth accelerated in December, climbing 6.7 percent to $25 billion, Rahul Khullar, secretary in the commerce ministry, told reporters in New Delhi today. Overseas sales rose 3.9 percent in November.

India’s trade deficit narrowed to $12.8 billion last month compared with a shortfall of $13.6 billion in November, Khullar said.

Food Costs

Mukherjee said the drop in the inflation reading was “mainly” because of a decline in food prices and added that the price-gauge would be 6 percent to 7 percent by the end of March.

Wheat prices fell 4 percent in December from a year earlier, today’s report showed. Prices of onions declined 60 percent, while potato costs dropped 36 percent.

Inflation is a political issue in India because it curbs purchasing power in a nation where the World Bank estimates more than three-quarters of the people live on less than $2 a day.

The Reserve Bank raised its repurchase rate by 375 basis points since the start of 2010 to tame price gains, the quickest round of increases since the central bank was established in 1935, according to data compiled by Bloomberg.

The central bank should start reversing its rate increases as inflation is expected to ease significantly in the coming months, the Wall Street Journal reported, citing Ashima Goyal, a member of the Reserve Bank’s Technical Advisory Committee, an advisory panel on monetary policy.

‘Important Input’

The recommendations of the committee are an “important input,” central bank spokeswoman Alpana Killawala said in an e- mailed response to Bloomberg News. She said views from other “stakeholders” are also taken into account, besides internal assessment of growth and inflation risks and that the “ultimate decision is based on a comprehensive consideration of all these risks by the RBI.”

India’s central bank must monitor manufacturing inflation before deciding on rates, Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council, said in an interview with Bloomberg UTV today.

Manufacturing inflation slowed to 7.41 percent in December from 7.7 percent in November, today’s report showed.

India’s inflation rate in January would be a little over 7 percent, Kaushik Basu, chief economic adviser in the finance ministry, said on Jan. 12.

BRIC Inflation

By comparison, consumer prices rose 6.5 percent in Brazil (BZPIIPCY), 6.1 percent in Russia and 4.1 percent in China last month.

China has scope to loosen fiscal and monetary policy, making it better placed than India to weather a global economic slowdown, Stephen Roach, non-executive chairman of Morgan Stanley Asia, said Jan. 12.

China is bringing inflation under control and has a small budget deficit, Roach said in an interview with Bloomberg Television. In contrast, India has a currency under pressure, an “inflation problem” and a large fiscal shortfall, he said.

Singh, halfway through his second term, faces five state elections starting this month, including one in Uttar Pradesh, home to a sixth of all Indians. The polls will offer an indication of the government’s support two years before national elections are due.

Protests over graft allegations in the award of telephone licenses triggered mass protests last year and a reversal on the foreign investment policy in the multibrand retail industry sapped confidence in his administration.

South Korea and Indonesia kept rates unchanged last week as a drop in their currencies risks heightening inflationary pressures even as the faltering global economy undermines growth prospects.

India’s central bank can afford to keep borrowing costs on hold for now after data this month showed industrial production in November rose 5.9 percent from a year earlier, rebounding from the worst month since March 2009.

Industrial output improved as cement production by companies including Ambuja Cements Ltd. (GAMB) increased 16.6 percent from a year earlier after stalling the previous month, according to the commerce ministry. Steel production gained 5.1 percent.

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

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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