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India Inflation Cools to Slowest Pace in 26 Months; Bonds, Stocks Advance

Indian inflation eased to the lowest level in more than two years in January, adding to the central bank’s case to cut interest rates as economic growth weakens. Bonds and stocks climbed.

The benchmark wholesale-price index rose 6.55 percent from a year earlier, the commerce ministry said in a statement in New Delhi today, compared with 7.47 percent in December. The median of 25 estimates in a Bloomberg News survey was 6.7 percent.

The Reserve Bank of India last month signaled readiness to join nations from Brazil to Indonesia in lowering rates if inflation eased further, with today’s report showing it has cooled to below the central bank’s forecast of 7 percent by March. Pressure to shield growth is rising after the government said the economy may expand by the least in three years.

“There is a sustainable decline in core inflation and growth continues to be below trend but the only unseen is the fiscal-deficit number,” said Sonal Varma, a Mumbai-based economist at Nomura Holdings Inc. The budget gap is “the only reason why we are expecting a rate cut in April” rather than earlier, she said.

The rupee, Asia’s worst performer last year with a 16 percent slide against the U.S. currency, weakened 0.4 percent to 49.3681 per dollar at the close in Mumbai. The BSE India Sensitive Index rose 0.4 percent. The yield on the 8.79 percent note due November 2021 declined three basis points, or 0.03 percentage point, to 8.18 percent from 8.21 percent.

Slowing Growth

Expansion has slowed after the Reserve Bank fought price increases by raising borrowing costs a record 3.75 percentage points from March 2010 to October last year, to 8.5 percent.

Inflation exceeded 9 percent each month from December 2010 to November 2011 before moderating in December as food costs fell. Last month’s gain in the wholesale-price index remains the fastest inflation rate in the so-called BRIC group of major emerging markets that also includes Brazil, Russia and China.

“I think inflation should be further reduced,” Finance Minister Pranab Mukherjee told reporters in New Delhi today. “It is still not at an acceptable level.”

Indian industrial output rose 1.8 percent in December from a year earlier, missing estimates and signaling weakening domestic demand, a report showed last week.

The impact of Europe’s debt crisis on exports has added to economic risks, with a trade deficit the commerce ministry projects at $160 billion for 2011-2012 threatening renewed pressure on the rupee. The currency has rebounded 7.5 percent so far this year.

Rate-Cut Signal

Indian gross domestic product may climb 6.9 percent in the 12 months through March from a year earlier, the least since 2008-2009, the government predicted this month. The economy grew 8.4 percent in each of the last two financial years.

The ability to lower rates could spur faster expansion in the 2012-2013 fiscal year, RBI Governor Duvvuri Subbarao said in an interview published in the Wall Street Journal today.

The Reserve Bank on Jan. 24 cut the amount of deposits lenders need to set aside as reserves for the first time since 2009 to ease a cash squeeze. It left the repurchase rate unchanged for a second meeting.

The central bank said inflation risks, such as the depreciation of the rupee and the fiscal shortfall, made it premature to cut rates last month, while reinforcing guidance that future rate actions “will be towards lowering them.”

“The pace of rate reduction will depend on the fiscal situation,” Deputy Governor Subir Gokarn said at a conference in Mumbai. “The budget is an opportunity for consolidation.”

Food-Price Decline

Food prices declined 0.52 percent in January compared with a year earlier, today’s report showed. Manufactured-products inflation was 6.49 percent, moderating from 7.41 percent in December. Fuel and power prices rose 14.21 percent last month, easing from 14.91 percent. India relies on imports to meet three-quarters of its annual energy needs.

Maruti Suzuki India Ltd. (MSIL), the country’s biggest carmaker, increased prices as much as 3 percent in January, citing higher input costs and the weaker rupee.

Mukherjee is due to present the budget on March 16, the day after the Reserve Bank’s next monetary policy meeting. Credit Suisse Group AG and Yes Bank Ltd. are among companies saying a rate cut is possible next month in Asia’s third-largest economy.

India may miss its goal of cutting the fiscal gap to 4.6 percent of GDP by March by at least 1 percentage point, according to Standard Chartered Plc and ICICI Securities Primary Dealership Ltd.

The Congress party, which leads the ruling federal coalition, is under pressure to revive growth after corruption allegations and protests against inflation hampered both its legislative agenda and efforts to boost investment.

To contact the reporter on this story: Unni Krishnan 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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