Indian Inflation Eases More Than Estimated to a 32-Month Low

Reserve Bank of India Governor Duvvuri Subbarao
Reserve Bank of India Governor Duvvuri Subbarao refrained from joining a wave of rate cuts from China to Europe last month as he tackles what is still the fastest inflation among the biggest emerging markets. Photographer: Dhiraj Singh/Bloomberg

Indian inflation eased more than estimated in July to a 32-month low, in a sign that faltering economic growth may be cooling price pressures.

The benchmark wholesale-price index increased 6.87 percent from a year earlier, after climbing 7.25 percent in June, the Commerce Ministry said in New Delhi today. The median of 29 estimates in a Bloomberg News survey was 7.2 percent.

Reserve Bank of India Governor Duvvuri Subbarao refrained from joining a wave of rate cuts from China to Europe last month as he tackles what is still the fastest inflation among the biggest emerging markets. The slowest economic growth in nine years may help counter the climb in costs, which has been fanned by a weaker rupee, food prices and gaps in infrastructure underscored in July by the nation’s worst power outages.

“On the surface, this number increases the scope for a rate cut but it is not a game changer as core inflation has moved up and pressures still exist like food prices spiking up later, oil remaining high, the rupee remaining weak,” said Vishnu Varathan, an economist at Mizuho Corporate Bank Ltd. in Singapore. Varathan added he is looking for no more than a 25 basis points interest-rate cut in September.

The yield on the 8.15 percent government bond due June 2022 rose to 8.22 percent from 8.20 percent yesterday. The BSE India Sensitive Index climbed 0.5 percent, while the rupee weakened 0.6 percent to 55.66 per dollar. The currency has tumbled more than 18 percent in the past year.

BRIC’s Fastest

Non-food manufactured goods prices, a measure of core inflation, rose 5.45 percent in July from a year earlier compared with 4.89 percent in June, according to calculations by Bloomberg.

Food articles climbed 10.06 percent last month, today’s statement showed, less than the previously reported 10.81 percent rise in June. Fuel and power increased 5.98 percent, compared with 10.27 percent in June.

“It’s too early to celebrate,” said Brinda Jagirdar, an economist at State Bank of India in Mumbai. “The headline inflation number is lower but core inflation, which is mainly manufactured products, has moved up.”

The pace of headline price increases remains the fastest in the BRIC group of largest emerging markets, which also includes Brazil, Russia and China.

Export Slide

Separately, Director General of Foreign Trade Anup Pujari said in New Delhi today that Indian exports fell 14.8 percent in July from a year earlier to $22.4 billion, while imports slid 7.61 percent to $37.9 billion, leaving a trade deficit of $15.5 billion.

Subbarao said yesterday a below-average monsoon may stoke expectations of higher costs. He has previously said headline inflation exceeds a “threshold” level of about 5 percent.

The Reserve Bank left its benchmark repurchase rate unchanged at 8 percent for a second meeting on July 31 while reducing the amount of deposits lenders must keep in government bonds to try and spur credit. It lowered borrowing costs by 0.5 percentage point in April, the first cut since 2009.

Asia’s third-largest economy expanded 5.3 percent in the first quarter, the least since 2003, hurt by the global slowdown and infighting in India’s ruling coalition that has set back Prime Minister Manmohan Singh’s efforts to revive investment.

The weakest monsoon rains in three years threaten to exacerbate the moderation in growth by crimping rural incomes while pushing up food costs by hampering farm output.

Government Spending

The Reserve Bank has also indicated that government spending is adding to price pressures, and that the need to raise fuel prices to pare energy subsidies and narrow the widest BRIC fiscal deficit may stoke inflation.

Indian Oil Corp., the state-owned supplier of about 40 percent of the fuels consumed in the country, reported a loss of 224.5 billion rupees ($4.04 billion) in the three months ended June 30, the biggest by any company in the country, after it sold products including diesel and kerosene below cost.

The subsidy compensation pending for the company highlights the case for raising administered energy prices. At the same time, the government is under pressure to protect the purchasing power of the poor in a nation where the World Bank estimates the majority of people still live on less than $2 per day.

Forecasters from Goldman Sachs Group Inc. to Citigroup Inc. this month lowered predictions for Indian economic expansion while raising inflation estimates and scaling back expectations for interest-rate reductions by the Reserve Bank.

Goldman cut its growth outlook for the 12 months through March 2013 to 5.7 percent from 6.6 percent and said wholesale prices may climb 7.2 percent, up from an earlier estimate of 6.5 percent. Citigroup said Indian gross domestic product may rise as little as 4.9 percent in 2012-2013 if a drought takes hold.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE