By Frank Jack Daniel
NEW DELHI, April 15 India's headline inflation
slowed to the lowest rate in more than three years in March,
hardening expectations the central bank will cut interest rates
next month to help the economy recover from its slowest growth
in a decade.
The encouraging price data was released as Finance Minister
P. Chidambaram began a series of roadshows in North America
aimed a drawing billions of dollars of investment to Asia's
ailing, third-largest economy.
Suffering from low growth and an investment drought, India
needs foreign inflows to help fund a worryingly high current
account deficit, while the central bank wants lower inflation to
feel more comfortable about reducing interest rates that are
among the highest of all the major economies.
Wholesale prices, India's key inflation measure,
cooled to 5.96 percent in March after an annual uptick to 6.84
percent in February, the trade and industry ministry said. It
was the lowest pace since November 2009 and less than forecast
by a Reuters' poll of economists.
"The fact that headline inflation is below 6 percent
strengthens the case for rate cut in May," Abheek Barua, Chief
Economist at HDFC bank in New Delhi, said.
Wholesale inflation has trended downwards from 8 percent in
September -- good news for Prime Minister Manmohan Singh's
government, which is gearing up for national elections due in
Singh has made reviving sluggish investment and economic
growth a top priority.
GDP growth hit a near four-year low of 4.5
percent in the quarter to end-December, while growth for the
fiscal year which ended last month is expected to be around 5
percent, and the lowest in a decade.
The lower-than-expected headline inflation figure briefly
buoyed stock and bond prices because of investors' view the
central bank was more likely to cut the benchmark repo rate from
7.5 percent when it next reviews policy on May 3.
But both markets stalled once realisation sank in that the
January inflation figure had been revised upwards to 7.31
percent from 6.62 percent.
The benchmark 30-share index still held a 0.66
percent gain, led by bank stocks, with State Bank of India Ltd
advancing 3.3 percent.
REASONS TO BE CAUTIOUS
A Reuters snap survey of analysts, made after the release of
the official data, showed closely watched core inflation, which
strips out volatile food and fuel prices, slowed to around 3.5
percent in March, the slowest rate in more than three years.
Analysts strongly doubted whether any rate cut by the
Reserve Bank of India in May would be more than 25 basis points.
While expecting the RBI to reduce rates again after next
month, Barua warned that the current account deficit and high
consumer prices meant there was little chance of "aggressive"
The central bank has made two 25 basis point rates cuts this
year in response to cooling inflation, but is concerned that if
it lowers rates too much it might undermine the rupee.
The currency is burdened by a current account gap that hit
an all-time high of 6.7 percent of GDP in the December quarter,
and a weaker rupee would result in inflationary pressures from
higher prices for imports.
"The RBI will be in a tough spot as the recent deterioration
in the current account position warrants rates to be left high
to cool the economy, though the softer inflation numbers provide
a window to ease with an eye on supporting the faltering growth
outlook," said Radhika Rao, an economist with DBS in Singapore.
Some economists believe India could benefit from inflows of
funds unleashed by a mega-monetary easing in Japan earlier this
month, but warn the net impact could be negative if yen flows
push up global commodity prices or domestic demand.
"The Bank of Japan's quantitative easing will certainly have
an impact on all emerging market economies including India as it
will increase the flow of capital into their financial markets
and create the risk of overheating, as their real sector
activity is quite subdued," said Rupa Rege Nitsure, chief
economist at Bank of Baroda in Mumbai.
(Reporting by Delhi and Mumbai bureau; Editing by Simon