Inflation eases to 3-yr low

The country’s headline inflation slowed to its lowest level in three years, hardening expectations for an interest rate cut by the RBI later this month to boost an economy that is set to post its slowest growth in a decade.

The wholesale price index (WPI), India's main inflation indicator, rose an annual 7.18 percent in December, the slowest since December 2009 and below analysts' forecast of 7.4 percent rise in a Reuters poll. Wholesale prices rose 7.24 percent in November.

The better-than-expected inflation data left most analysts debating not whether the Reserve Bank of India would cut interest rates at its policy review on January 29, but by how much.

Following the inflation data, financial markets rallied in anticipation of an early rate cut. India's 10-year bond yield fell to its lowest in 29 months. The rupee strengthened against the dollar, while swap rates fell.

The slowdown in the headline inflation was led by a moderation in the prices of fuel and manufactured goods. The annual reading for October was revised down to 7.32% from 7.45%. 

And a drop in nonmanufacturing inflation, used by the RBI to gauge demand-driven price pressures, to 4.2% in December from 4.5% a month ago further bolstered hopes for the long-awaited cut.

Last month, amid mounting calls from politicians and industry for a lower borrowing rates, the RBI signalled a possible reduction in the January-March quarter.

The policy repo rate has remained unchanged at 8.0 percent since April 2011, putting India's interest rates among the highest of the major economies.

While a slowdown in the global economy has prompted many other central banks to support growth through monetary stimulus, the RBI has hitherto rebuffed calls for lower lending rates citing high inflation and the size of the fiscal deficit.

India’s economic growth that once looked poised to hit double-digits has been stuck below 6 percent for the past three quarters, hurt by a combination of weak investment and consumer demand.