India's inflation nears zero

Inflation in India has dropped close to zero, according to official data, as the threat of deflation in the country grows. The latest fall in inflation, sharper than expected, stoked expectations of a new cut in interest rates.


AFP - Inflation in India has dropped close to zero, official data showed Thursday, as Asia's third-largest economy continued a sharp slide towards deflationary territory.

Annual inflation fell to 0.44 percent for the week ended March 7 from 2.43 percent the previous week, according to the Wholesale Price Index, the most watched cost-of-living measure.

The fall stoked expectations the central bank would cut interest rates again in a bid to jolt the economy out of a looming deflationary period.

India's inflation rate has slid from a 13-year high of 12.91 percent last August due to a slump in oil and other global commodity prices as well as the effects of the worldwide slowdown.

The central bank still "has the leeway to lower rates further," said D.K. Joshi, principal economist at ratings agency Crisil.

The bank has slashed its key short-term lending rate to commercial banks by 400 basis points since October to a record low of five percent to spur growth.

The latest drop, bringing inflation to its lowest level since the current inflationary series began in 1993-94, was sharper than expected. Economists had forecast inflation at between 0.80 and 0.94 percent.

The inflation fall comes as India's Congress-led government faces elections starting in April. The country's millions of poor, whose voting support is crucial, were hardest hit by the price surges of the past few years.

But the sting in the tail for the government has been a slowdown in growth stemming from what one analyst called "demand destruction" as India starts to feel the full impact of the global slump.

The government expects growth to slacken this year to 7.1 percent -- the weakest in six years --- after three years of heady annual expansion of nine percent.

But economists say the figure will be below seven percent and warn the economy will lose more steam next year, slowing to 5.5 percent or lower -- still strong by global standards but not enough to raise the living standards of India's destitute.

Most recent figures showed the economy grew at its slowest pace in six years at 5.3 percent in the third quarter to December, down from 8.9 percent in the same period a year earlier.

Inflation will hit zero by the end of this fiscal year later this month, according to Axis Bank economist Saugata Bhattacharya. It would mark India's first bout of deflation since March 1976, according to central bank records.

Some analysts said they expected deflation to be short-lived but others said it could last until year end.

Inflation could remain negative until the end of 2009 "driven by the ongoing demand destruction" as well as the high base effect of the previous year when inflation was at elevated levels, Goldman Sachs economist Tushar Poddar said.

"In 2010 we expect inflation to come back due both to a gradual pickup in demand and a low base from 2009," he said.

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