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Inflation Eases To 7.24%; Rate Cuts Eyed

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India's wholesale inflation cooled to its weakest pace in 10 months in November, a positive sign for the struggling economy but probably not a big enough slowdown to persuade the RBI cut interest rates next week.


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 7.6 per cent and below October's 7.45 per cent. An easing in annual fuel and manufacturing inflation helped rein in price pressures.


"I don't think the RBI will be in a position to reduce policy rates on December 18," said Rupa Rege Nitsure of Mumbai's Bank of Baroda. "But, the probability of a rate reduction in the month of January has now gone up."


India's 1-year overnight index swap fell around 3 basis points after Friday's data.


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


However, the economy is still headed for the weakest full-year growth in a decade, at about 6 percent, far below the near double-digit pace before the global financial crisis.


The Reserve Bank of India (RBI) has not lowered interest rates since April because inflation has remained near 7 per cent, exacerbated by a weak rupee that has added to the cost of fuel imports.


The central bank has said any interest rate cut is "highly improbable" at the policy meeting on Tuesday. But given the sharply lower number, some analysts now see an outside chance the bank will change its mind.


"Given the food and manufacturing prices are much better behaved than what many private analysts had predicted, we expect inflation by March-end to be sub-7 percent," said A Prasanna, an economist at ICICI Securities in Mumbai.


"There is nothing that should stop them from cutting rates in December," Prasanna said.


Rating agency Standard & Poor's warned again on Tuesday that India's credit rating faces a one-in-three chance of being downgraded to junk over next 24 months because of a heavy debt burden and pressure on the fiscal deficit, which is seen overshooting a target of 5.3 percent in the fiscal year ending in March.
 
Expert Views: 
Robert-Prior-Wandesforde, economist, Credit Suisse, Singapore
"It's the second consecutive pleasant surprise. I think maybe this is the first sign we're getting another downward leg in inflation. This is something we've been anticipating for some time. I think it's going to fall further. I'm looking for the headline rate to come below 7 per cent in February. I think it will come below 6 per cent from around the middle of 2013, which in turn sets us up quite nicely for not just one RBI rate cut at the January meeting but perhaps a series of reductions."
 
Rupa Rege Nitsure, chief economist, Bank Of Baroda, Mumbai 
"Today's data primarily reflects reduced pricing power of manufacturing companies on the back of severe demand slowdown. This means, despite the festival season, manufacturing companies were not able to pass on increased cost pressures to the consumer. It's a definite sign of moderating inflation on account of growth slowdown yet the number is quite high per se. And, I don't think the RBI will be in a position to reduce policy rates on December 18. But the probability of a rate reduction in the month of January has now gone up."
 
A. Prasanna Economist, ICICI Securities Primary Dealership, Mumbai 
"Given the food and manufacturing prices are much better behaved than what many private analysts had predicted, we expect inflation by March-end to be sub-7 per cent. The slowdown in manufacturing inflation in the last couple of months has a more positive impact compared with the rupee depreciation and we expect RBI to cut rates in the March quarter.
 
"There is nothing that should stop them from cutting rates in December barring the fact that headline WPI can go up for one month due to base effect and RBI could be more concerned about the optics when it wants to cut rates."
 
 (Reuters)