India may cut rates over inflation data

India’s wholesale inflation cooled to its weakest pace in 10 months in November, a sign the economy may finally be escaping a long period of price pressure and raising the chances of a rate cut in January.

The wholesale price index (WPI), India’s main inflation gauge, rose 7.24 per cent from a year earlier, below expectations for a rise of 7.6pc and below October’s 7.45pc. An easing in annual fuel and manufacturing inflation helped rein in price pressures.

The Reserve Bank of India (RBI) holds its next policy meeting recently but has said a rate cut is “highly improbable.” The tilt towards a period of softer inflation though is raising expectations the central bank might cut its 8pc repo rate in January.

“The probability of a rate reduction in the month of January has now gone up,” said Rupa Rege Nitsure, chief economist at Bank of Baroda in Mumbai.

November was the second straight month that prices rose less than economists had forecast, which Robert Prior-Wandesforde, economist with Credit Suisse in Singapore described as a “pleasant surprise”.

“I think maybe this is the first sign we’re getting another downward leg in inflation,” said Prior-Wandesforde, who forecasts inflation will drop below six per cent in 2013, possibly leading to a series of rate cuts.

India’s one-year overnight index swap fell around three basis points after yesterday’s data.

Cooling prices are welcome news for Prime Minister Manmohan Singh, a veteran economist who has launched a raft of reforms since September aimed at reviving both the economy and his government’s flagging fortunes ahead of a general election.

“Our expectation is it will trend downwards over the next two to three months,” Finance Minister P Chidambaram said.

The inflation data comes after an increase in industrial output in October and data indicating that infrastructure output and investment are picking up, raising hopes a slide in India’s economic growth is coming to an end.

The government approved a new body to streamline infrastructure projects, and bills aimed at attracting more foreign cash into the banking, pension and insurance industries may be passed next week.

Recent government policies to attract investment from foreign supermarkets and to tackle budget-busting fuel subsidies pleased domestic markets, but economists say more needs to be done to control India’s fiscal deficit, which is the biggest among major emerging economies as a proportion of GDP.

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