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Indian Inflation Hits Two-Year Low but No Early Rate Cut Seen - ASHARQ AL-AWSAT English Archive
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NEW DELHI (AFP) -India’s inflation rate fell to a two-year low, official data showed, but economists expected the central bank to remain hawkish with global oil prices surging.

The wholesale price index, India’s most closely watched cost-of-living monitor, showed annual inflation slowed to 3.52 percent for the week ended September 1 — its lowest level since August 2005 — from 3.79 percent a week earlier.

But economists said they expected no early easing of interest rates amid worries that record international crude oil prices could trigger a rise in state-set domestic fuel prices.

“I think the bank is still hawkish, they believe inflationary expectations have not yet been doused,” D.K. Joshi, principal economist at leading credit rating agency Crisil, said on Friday.

Joshi said he expected the bank to leave benchmark rates unchanged at its next monetary policy meeting in late October.

The inflation drop, in an economy which has been growing by more than nine percent, was spurred by a decline in some food and manufactured goods prices.

An acceleration in prices a year ago also helped make the fall look sharper.

Inflation stood at 5.34 percent in the same week a year ago.

The annual rate marked the third straight week that inflation was below the bank’s medium-term target of four to 4.5 percent.

But the bank’s governor Y.V. Reddy warned on Thursday that India could not remain immune to international inflationary pressures from such factors as rising global crude oil and commodity prices.

Media reports say the petroleum ministry wants a rise in government-set retail prices to staunch losses at state-owned oil firms, a move that would boost inflation. India imports about 70 percent of its crude oil needs.

“The policy preference for the period ahead is strongly in favour of price stability,” Reddy said in what economists saw as a signal of continued vigilance.

Economic growth is expected to decline to 8.5 percent to nine percent in the financial year to March 31, 2008 as a result of successive interest rate hikes to prevent overheating that have pushed borrowing costs to five-year highs.

The economy expanded by 9.4 percent the previous year.

In the first major sign of economic slowing, figures this week showed July industrial output growth decelerated to 7.1 percent, a sharp fall from June’s 9.8 percent. Industrial growth was 13.2 percent in the same month a year earlier.

“I think the bank will wait and watch to see whether this drop is a blip or whether growth has really started slipping” before deciding whether to loosen monetary policy, said Joshi.

The industrial slowdown could lead the central bank to loosen rules on lending, but an early rate cut was unlikely, other economists said.

“Risks to the inflation outlook persist,” said Rajeev Malik, economist at JP Morgan.

Asharq Al-Awsat

Asharq Al-Awsat

Asharq Al-Awsat is the world’s premier pan-Arab daily newspaper, printed simultaneously each day on four continents in 14 cities. Launched in London in 1978, Asharq Al-Awsat has established itself as the decisive publication on pan-Arab and international affairs, offering its readers in-depth analysis and exclusive editorials, as well as the most comprehensive coverage of the entire Arab world.

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