Indian inflation falls to 16-month low

Sep 7, 2007 - India's annual inflation has fallen to a 16-month low helped by lower food prices, data on Friday showed, fuelling expectations that the central bank will loosen its monetary policy.

The wholesale price index, India's closest watched cost-of-living monitor, showed annual inflation slowed to a lower-than-expected 3.79 per cent for the week ended August 25, down from 3.94 per cent a week earlier.

'Some relaxation of the tight monetary stance' by the central bank 'makes some sense as inflation is hovering below 4 per cent', said economist Shashank Bhede at the National Council for Applied Economic Research, India's top economic research think-tank.

'It is only a question of timing now,' Mr Bhede said.

The latest official data showing inflation below 4 per cent for a second straight week came as welcome news to India's Congress-led government as inflation has emerged as a major political issue because of the burden it imposes on the nation's millions of poor households.

Annual inflation stood at 5.27 per cent during the corresponding week earlier a year ago.

The lower inflation was driven by cheaper food products and some manufactured goods, the data showed.

The latest weekly rate is considerably below the Reserve Bank of India's inflation forecast of close to 5 per cent for the financial year to March 2008.

The rate is also below its medium-term forecast of 5 per cent for the current fiscal and 4-4.5 per cent for the medium term.

Most analysts had expected that the rate would fall to about 3.9 per cent.

The central bank, which began tightening monetary policy in October 2004, has driven interest rates to five year highs in its bid to tame prices.

The monetary tightening has led to forecasts that economic growth will slow this year to around 8.5 per cent to 9.0 per cent from last year's blistering 9.4 per cent, which was the fastest expansion in nearly two decades.