Indian inflation falls to near zero

New Delhi , March 20 2009

India is on course for a deflationary dip after data yesterday showed the country's wholesale price index rose by only 0.44 per cent earlier this month in spite of government efforts to stimulate the economy.

India's inflation has been falling steadily since August when it peaked at nearly 13 per cent as commodity prices, most particularly crude oil, have cooled and the domestic economy has slowed. Yesterday's figures for the week ending March 7 were the lowest since 1995, when the current measurement began, and were a lower than expected drop on the previous week's reading of 2.43 per cent.

Economists predict that deflation will set in by the end of March, but will be temporary as policymakers take steps to defend high rates of economic growth.

"With negative readings already seen in China and Japan, deflation is now priced in across big economies. This may not be prolonged as policymakers are taking aggressive measures to reflate economies," said Rohini Malkani, economist at Citigroup India in Mumbai. "I thought we would see deflation in the second half of the year, but it is knocking at the door now. It paves the way for interest rates to be cut further," said Deepak Lalwani, the director of India investments at Astaire & Partners, a London stockbroker.

But a senior government official said India would avoid deflation as an economic revival was being felt.

"I do not see any signs of deflation, as demand for certain core sectors like steel, cement and automobiles is picking up, as is also rural demand," said K.M. Chandrasekhar, the cabinet secretary. "The inflation trend clearly shows that the stimulus packages rolled out by the government are starting to show results."

The fall in inflation to near zero prompted the country's industrialists to call for interest rate cuts to boost the economy. They complain that commercial banks have not passed on to borrowers progressive cuts by the Reserve Bank of India of its key lending rate in emergency measures to ease a liquidity crunch.

Since October, the RBI has cut the repurchase rate by 400 basis points and relaxed the cash reserve ratio - the amount banks have to hold with the central bank.