India inflation rate eases to lowest in three years

MUMBAI, India (AP) - Inflation in India declined to a three-year low in March, possibly allowing the central bank to keep cutting interest rates to help revive a sputtering economy.

Wholesale price inflation fell to 6 per cent from 6.8 per cent in February, according to provisional figures on Monday from the Ministry of Commerce.

However, food prices were still rising sharply and were 8.7 per cent higher in March than the previous year. Higher prices were particularly prominent in staples such as wheat, up 19.9 per cent, and rice, which rose 17.9 per cent. Fuel costs jumped 10.2 per cent.

The central bank has cut borrowing rates twice this year to help jumpstart Asia's third-largest economy but has been hesitant to move too aggressively for fear of making inflation worse.

The inflation rate reported on Monday was the lowest in 40 months and was encouraging news after years of inflation hovering between 7 and 8 per cent, said Nomura India economist Sonal Varma.

"Still, food inflation remains quite high and that is worrisome," economist Varma said.

Food and fuel are the biggest expenses for India's poor. Some 825 million of India's 1.2 billion people live on less that US$2 (S$2.5) a day, the World Bank estimates.

The government has forecast 5 per cent economic growth for the fiscal year that ended in March, the slowest in a decade.

The bank has pledged to bring overall wholesale inflation down to below 4.5 per cent.

Economist Varma said the Reserve Bank of India's two previous cuts in the key rate at which it lends money to financial institutions still has not resulted in banks passing on the savings to businesses and consumers. That, plus a report last week showing growth in monthly industrial production slowed to just 0.6 per cent could prompt the central bank to cut interest rates again when it meets May 3.

"The balance favours probably easing," economist Varma said. "A rate cut is not a done deal, even though inflation numbers have come down."

India's stock benchmark, the Sensex, was up 0.5 per cent on Monday afternoon to 18,334.63 as traders interpreted the inflation report as increasing chances of another interest rate cut.