Easing inflation makes case for RBI rate cut in December

The country's inflation dropped to a new multi-year low in October, helped by slower annual rises in food and fuel prices, intensifying pressure on the central bank to cut interest rates to encourage spending and investment needed to boost growth.

The wholesale price index (WPI) based inflation rose an annual 1.77 per cent in October, its lowest level since September 2009, compared with the 2.20 per cent forecast by economists in a Reuters poll.

WPI inflation data comes days after the government reported that retail (or CPI-based) inflation had dropped to 5.52 per cent in October, below the Reserve Bank of India's (RBI) 6 per cent target for January 2016.

"With inflation at or under 6 per cent we think RBI is likely to face pressure to ease, not just from the government, but also from RBI's own policy committee," said Devika Mehndiratta, a senior economist at Australia and New Zealand Banking Group in Singapore.

The economist expects retail inflation to hit a low of close to 4 per cent in November, opening up an opportunity for an interest rate cut of 25 basis points in the second quarter of 2015.

Businesses and corporates in the country have been pleading for a cut in interest rates to stimulate consumption in the economy, which is mostly domestic demand-driven.

Consumer goods output - a proxy for consumer demand that drives 60 per cent of the domestic economy - has grown in just two of the last 21 months. It fell an annual 4.0 per cent in September.

The central bank is meeting on December 2 for its next monetary policy review, having kept the key repo rate steady at 8.0 per cent since January.

A Reuters poll in October had shown that economists expected rates to be held unchanged until well into 2015, due to worries that price pressures would revive once a favourable base effect fades out and food prices rise after poor rains in the summer.

Bond traders are betting on one of the biggest interest rate reductions among major emerging markets once the rate cutting cycle begins.

The 10-year benchmark bond yield had dropped 36 basis points since October 1 until the last session on hopes of a rate cut.

(Reuters)