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Indian Inflation Slows to 38-Month Low; Boosts Rate-Cut Case

India Inflation Slows to 38-Month Low in Boost for Rate-Cut Case
Pedestrians walk past an art gallery in Hauz Khas Village in New Delhi, India. Photographer: Sanjit Das/Bloomberg

Indian inflation slowed to a more than three-year low in January, a deceleration that if sustained may boost room for another interest-rate cut as growth falters.

The wholesale-price index rose 6.62 percent from a year earlier, after climbing 7.18 percent in December, the Commerce Ministry said in a statement in New Delhi today. The median of 34 estimates in a Bloomberg News survey was 6.98 percent.

India last month became the first major Asian nation to lower borrowing costs in 2013 as the central bank moved to back government policy changes aimed at reviving private investment. At the same time, Governor Duvvuri Subbarao signaled the space to reduce rates again is limited, and the government has vowed to curb spending in the Feb. 28 budget to damp price increases.

“The budget will focus on fiscal consolidation to damp price pressures and boost long-term growth prospects,” said Anubhuti Sahay, an economist at Standard Chartered Plc in Mumbai. While inflation has moderated, the scope for “aggressive” monetary-policy easing remains constrained, she said.

The rupee, which has weakened about 8.4 percent versus the dollar in the past year, slid 0.2 percent to 53.905 as of 1:19 p.m. in Mumbai. The BSE India Sensitive Index of stocks fell 0.1 percent. The yield on the 8.15 percent note maturing June 2022 declined to 7.81 percent from 7.85 percent yesterday.

Prime Minister Manmohan Singh began policy changes in September to aid investment after corruption allegations against officials and parliamentary gridlock hurt his development agenda.

Policy Push

The steps included opening retail and aviation to more foreign participation, easing caps on capital inflows and setting up a panel to speed up infrastructure projects.

The government also partially freed diesel prices from state control last month to limit fuel subsidies.

Finance Minister Palaniappan Chidambaram has vowed to contain the fiscal deficit at 5.3 percent of gross domestic product in 2012-2013 and pare it to 4.8 percent the following year, seeking to lower the odds of a credit-rating downgrade.

Data this week showed industrial output fell unexpectedly for a second month in December and that the trade gap in Asia’s No. 3 economy swelled to $20 billion in January, one of the nation’s widest monthly shortfalls.

Indian consumer-price inflation reached 10.79 percent last month, the second highest in the Group of 20 major nations.

Inflation remains “high,” investment has declined and the “external sector is very vulnerable,” Subbarao said Feb. 11.

Subdued Recovery

That highlights threats to an economy facing a subdued recovery from an expansion the statistics office projects at a decade-low 5 percent in the fiscal year through March 2013.

The risks limited the central bank to a quarter-point reduction in interest rates to 7.75 percent in January, the first cut since April last year.

Non-food manufactured goods prices, a measure of core inflation, rose 4.08 percent in January from a year earlier, compared with 4.19 percent in December, calculations by Bloomberg showed based on today’s report. Food articles climbed 11.88 percent. Fuel and power increased 7.06 percent.

Indian companies have been buffeted by climbing costs and faltering growth. Sales at Tata Motors Ltd., India’s largest automaker, plunged 30 percent in January. Hyundai Motor Co.’s Indian unit raised prices this month.

The International Monetary Fund forecasts 6 percent Indian GDP growth in the 12 months beginning April 2013, compared with the nation’s average of about 8 percent in the past decade.

“The RBI will likely be cautious in easing,” Jyoti Narasimhan, India economist at IHS Global Insight in Bangalore, said before the release. “All eyes are on the budget to see measures to ease price pressures and spur the economy.”

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