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India Inflation Cools in Rate-Cut Boost as Tax Crackdown Delayed

Indian Inflation Slows to 11-Month Low, Boosting Rate-Cut Case
A woman sells seafood at a market in Port Blair, India. The administration has opened industries such as retail to more overseas investment and pledged to contain the budget deficit, seeking to boost confidence in Asia’s No. 3 economy and avert a credit-rating downgrade. Photographer: Brent Lewin/Bloomberg

Indian inflation eased to a three-year low in December, boosting scope for an interest-rate cut to revive economic growth as a delay in a tax clampdown that had spooked foreign investors buoyed stocks, bonds and the rupee.

The benchmark wholesale-price index rose 7.18 percent in December from a year earlier, the slowest pace since December 2009, the Commerce Ministry said yesterday. A crackdown on tax avoidance will take effect in the year starting April 1, 2016, rather than 2014, Finance Minister Palaniappan Chidambaram said.

Chidambaram, who unveiled the delay as he prepares to start a tour of Asia and Europe to woo investors, has also called for cheaper credit to back recent government efforts to spur a struggling economy. India’s central bank signaled Dec. 18 that monetary policy should shift toward revitalizing growth as the fastest inflation among major emerging markets slows.

“Easing headline inflation supports the likelihood of the central bank cutting rates in the January review,” said Aditi Nayar, a senior economist at ratings company ICRA Ltd. in Gurgaon, near New Delhi. Still, a “wide” deficit in the current account, the broadest measure of trade, and lingering price pressures will lead to “cautious” policy easing, Nayar said.

The yield on the 8.15 percent government bonds due June 2022 fell to 7.80 percent at the 5 p.m. close in Mumbai yesterday, from 7.87 percent on Jan. 11. The BSE India Sensitive Index rose 1.2 percent. The rupee strengthened 0.5 percent to 54.5 per dollar.

Interest Rates

The Reserve Bank of India will lower borrowing costs 25 basis points to 7.75 percent on Jan. 29, according to 13 of 16 analysts in a Bloomberg News survey. The rest expect a 50 basis-point cut.

The Finance Ministry predicts gross domestic product will rise as little as 5.7 percent in the year to March 31, the slowest since 2002-2003.

Indian inflation remains the fastest in the BRIC group of major emerging markets, stoked by supply bottlenecks and a 5.5 percent drop in the rupee in the past 12 months. BRIC includes Brazil, Russia, India and China.

Non-food manufactured goods prices, or core inflation, rose 4.19 percent in December from a year earlier, compared with 4.49 percent in November, according to calculations by Bloomberg. Food articles climbed 11.16 percent last month. Fuel and power increased 9.38 percent.

A panel set up by Prime Minister Manmohan Singh in July to review tax changes recommended that the so-called General Anti-Avoidance Rules be delayed. Chidambaram said yesterday the government has accepted the panel’s major recommendations.

‘Positive Move’

“It’s a positive move,” said Deven Choksey, managing director at K.R. Choksey Shares & Securities Pvt. Ltd. in Mumbai. “The announcement will help sustain capital inflows in 2013.”

Global funds turned net sellers of Indian stocks in April and May after tax changes stoked concern that investments in Indian assets, which are sometimes routed through third countries to reduce levies, would face higher charges.

Singh’s administration since mid-September has opened industries such as retail to more foreign investment and pledged to contain the budget deficit, seeking to boost confidence in Asia’s No. 3 economy and avert a credit-rating downgrade.

Some companies have felt the impact of subdued economic growth and cost increases. Local passenger-car sales by companies such as Tata Motors Ltd. fell a second month in December, Society of Indian Automobile Manufacturers data shows.

Another report yesterday showed Indian consumer prices climbed 10.56 percent in December from a year earlier.

Separately, the Reserve Bank yesterday confirmed that Urjit Patel has been appointed as one of four deputy governors, for a period of three years from Jan. 11.

He will handle monetary policy, financial markets, economic and statistical research and communication, among other functions, the central bank said on its website.

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