India’s October Inflation Unexpectedly Eases to 8-Month Low

India’s inflation unexpectedly eased to an eight-month low in October, a slowdown that may be limited as the effects of a diesel-price increase spread through Asia’s third-largest economy.

The wholesale-price index rose 7.45 percent from a year earlier after climbing 7.81 percent in September, the Commerce Ministry said in a statement in New Delhi today. The median of 28 estimates in a Bloomberg News survey was 7.9 percent.

The Indian government boosted diesel tariffs by about 14 percent two months ago to curb fuel subsidies that have stoked a budget deficit. The central bank on Oct. 30 predicted faster inflation this quarter following the move, while signaling it may cut interest rates in the January-to-March quarter next year as price pressures subsequently moderate.

“The recent fuel subsidy cuts will stoke fuel inflation in the coming months, and have secondary effects on core inflation,” said Jyoti Narasimhan, India economist at IHS Global Insight in Bangalore. “With inflation unlikely to recede substantially, we no longer expect the Reserve Bank of India to soften its stance and cut policy rates” at the next review on Dec. 18, she said.

The rupee has weakened more than 8 percent against the dollar in the past year, while the BSE India Sensitive Index (SENSEX) has gained more than 8 percent. The country’s financial markets are closed today.

Prime Minister Manmohan Singh overhauled economic policies in September to avert a credit-rating downgrade and bolster an economy that the International Monetary Fund forecasts will expand 4.9 percent in 2012, the least in a decade.

Interest Rates

The policy revamp included the diesel-price increase, the first in over a year, steps to open industries such as retail to more foreign investment and efforts to stem the rupee’s slide.

Indian inflation, fanned by food and energy costs, is the fastest in the BRIC group of largest emerging markets that also includes Brazil, Russia and China. The nation also faces the widest BRIC budget deficit.

Such risks have curbed the Reserve Bank of India’s scope to join nations from Brazil to Thailand in extending rate cuts as the global recovery falters.

Reserve Bank Governor Duvvuri Subbarao held interest rates at 8 percent for a fourth meeting on Oct. 30, while reducing banks’ reserve requirements to 4.25 percent from 4.5 percent.

Finance Minister Palaniappan Chidambaram had called for cheaper credit before the rate decision. He pledged on Oct. 29 to contain the budget shortfall at 5.3 percent of gross domestic product in the year through March 2013, as officials try to increase the central bank’s scope for a rate cut.

Fuel prices gained 11.71 percent in October from a year earlier, today’s report showed. Manufactured goods prices rose 5.95 percent compared with 8.05 percent a year earlier. The inflation rate for August was revised today to 8.01 percent from 7.55 percent earlier.

Slower expansion and elevated inflation have dimmed the outlook for automakers Maruti Suzuki India Ltd. and Hyundai Motor India Ltd. The Society of Indian Automobile Manufacturers sees full-year domestic sales growth of as little as 1 percent.

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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