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India inflation near zero leave room for rate cut

Posted on: April 4, 2009


Reuters – Friday, April 3

* March 21 WPI inflation rate steady with a week earlier

* Seen going negative in coming weeks

* CPI still near double digits

By Rajesh Kumar Singh

NEW DELHI, April 2 – India’s annual inflation rate hovered above zero in mid-March and analysts said they expect it to turn negative in the next couple of weeks, providing enough room to the central bank to further ease monetary policy.

The wholesale price index <INWPI=ECI>, India’s most widely watched inflation measure, rose 0.31 percent in the 12 months to March. 21, basically steady with the previous week’s 0.27 percent and slightly above a forecast of 0.18 percent in a Reuters poll.

“Inflation will go into the negative territory in mid-April and we are looking at a 5-6 month period of negative inflation,” said Abheek Barua, chief economist at HDFC Bank.

“It will bottom out in July and turn positive in November or December. This gives RBI more room to ease up monetary policy.”

The bond market and rupee showed little reaction to the data, while an already strong stock market <.BSESN> extended gains of 4 percent to more than 5 percent.

Atsi Sheth, chief economist at Reliance Equities, said the the slowing in the rapid decline in the inflation rate was good news for growth, showing that while demand was declining it was not plummeting.

ROOM FOR CUTS?

Prime Minister Manmohan Singh has said plenty of liquidity and low inflation offered room for further interest rate cuts.

Growth in Asia’s third-largest economy is expected to have slowed to about 7 percent in 2008-09 from rates of 9 percent or more in the three previous years, as the global slowdown hit.

The central bank has cut its main short-term lending rate by 400 basis points in five moves since October, and the central bank has called on banks to pass the lower rates on to customers.

Manufacturing activity contracted for a fifth straight month in March and exports fell sharply in February, and Reserve Bank of India governor Duvvuri Subbarao last week said that stemming the slowdown was the current policy challenge.

Subbarao also said there was no concern about India falling into a deflationary cycle. The consumer price index, which is released monthly, rose an annual 9.63 percent in February.

And with food prices high and liquidity in money markets improving, not all economists saw a rate cut as imminent.

“The central bank is not likely to touch key rates in the next policy as liquidity has improved significantly and also banks’ lending rates to consumers and corporates have softened to the extent possible,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

(Additional reporting by Rajkumar Ray and India Treasury team)

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