India Inflation at 43-Month Low; Rupee Curbs Rate-Cut Scope

Indian inflation slowed to a 43-month low in May, a moderation that may fail to spur another interest-rate cut by the central bank as a plunge in the rupee threatens to fan price pressures.

The wholesale-price index rose 4.7 percent from a year earlier, after climbing 4.89 percent in April, the Commerce Ministry said in a statement in New Delhi today. The median of 35 estimates in a Bloomberg News survey was 4.88 percent.

The rupee’s drop to a record low this week may stoke import costs in a nation that buys about 80 percent of its crude oil from overseas. India’s finance minister said yesterday steps are being taken to steady the currency, whose decline has led forecasters from Goldman Sachs Group Inc. to DBS Bank Ltd. to predict the central bank will refrain from a fourth-straight rate cut at the review due June 17.

“While the downtrend in inflation is providing comfort for easing, the rupee’s decline is playing spoilsport and will limit the central bank from cutting rates,” said Tirthankar Patnaik, a Mumbai-based strategist at Religare Capital Markets Ltd.

The rupee, which touched an all-time low of 58.9850 per dollar on June 11, appreciated 0.6 percent to 57.625 as of 1:04 p.m. in Mumbai. The S&P BSE Sensex index advanced 1.4 percent. The yield on the 8.15 percent bond maturing June 2022 slid to 7.51 percent from 7.55 percent yesterday.

Reserve Bank of India Governor Duvvuri Subbarao will keep the repurchase rate at 7.25 percent, 14 of 23 analysts said in a Bloomberg News survey. The rest predict a reduction to 7 percent.

Borrowing Costs

Subbarao lowered borrowing costs in January, March and May by 25 basis points at each meeting to boost investment in an economy that expanded a decade-low 5 percent last fiscal year.

While inflation has “come off the peak,” consumer-price growth still remains “quite high,” Subbarao said June 7. The success of monsoon rains will be an important factor in determining monetary policy in the next three months, he said.

A report earlier this week showed consumer prices advanced 9.31 percent in May from a year earlier, the second-fastest pace in the Group of 20 major economies.

The central bank has said its threshold level for wholesale inflation may be about 5 percent. Every 10 percent decline in the rupee adds as much as 80 basis points to wholesale-price inflation, according to estimates by Nomura Holdings Inc. The currency is down about 6 percent this quarter.

Restoring Confidence

The onus is on the government to restore confidence by extending a nine-month policy push that seeks to revive a struggling economy, said Rupa Rege Nitsure, an economist at Bank of Baroda in Mumbai.

Finance Minister Palaniappan Chidambaram signaled yesterday more caps on foreign-direct investment may be eased this month.

He’s striving to woo funds to finance a record current-account deficit, which has weighed on the rupee. The shortfall was $32.6 billion in the last quarter of 2012, or 6.7 percent of gross domestic product.

Prime Minister Manmohan Singh began changes in September to lure investment and avert a credit-rating downgrade. Steps have included paring the budget deficit, liberalization in the retail and aviation industries to attract overseas capital and a drive to speed up infrastructure projects.

Fitch Ratings revised India’s credit-outlook to stable from negative on June 12, citing the government’s efforts. That provided some succor for Singh, whose coalition has been hurt by graft scandals and depressed economic expansion.

Domestic sales in India’s passenger-car industry, which includes manufacturers such as Maruti Suzuki India Ltd., fell 12.3 percent in May from a year earlier, in a sign consumer spending is still faltering.

Food prices climbed 8.25 percent in May from a year earlier, today’s report showed. Fuel and power rose 7.32 percent. March inflation was revised to 5.65 percent from 5.96 percent.

Non-food manufactured goods prices, a measure of core inflation, advanced 2.35 percent after a 2.74 percent gain in April, according to Bloomberg calculations based on the data.

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