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Thursday, December 20, 2007

India's Wholesale Inflation Slows Again

India's wholesale inflation slowed again in the first week of December as food costs declined, giving the government some room to raise prices of gasoline and diesel for the first time in more than a year. Wholesale prices rose 3.65 percent in the week ended Dec. 8 from a year earlier, slower than last week's rate of 3.75 percent, the Ministry of Commerce and Industry said today in New Delhi.

Inflation has held below the Reserve Bank of India's 5 percent target for five months. Still, price pressures may be reignited as the government may have to increase retail fuel costs if crude oil rises further, according to the central bank.

The relevant ministers are due to meet next week to discuss increasing fuel prices, according to Oil Minister Murli Deora speaking last week. India hasn't increased retail fuel prices so far this year, although global oil rates have risen more than 50 percent. The slowdown in prices will help Prime Minister Manmohan Singh to sustain the fastest pace of economic growth in 60 years and will reassure the central bank that short term prices are not likely to exceed the 5 percent year-end target.

The Reserve Bank is scheduled to meet in the last week of January to review interest rates, and has already raised its benchmark interest rate nine times since October 2004 in its battle to control inflation.

Economic Growth

India has mow been expanding at a rate of aprroximately 9 percent since April 2005, making it the fastest after China among the world's top 15 economies, and the Singh government would like to be able to accelerate growth to a 10 percent pace by 2012.

Indian policy makers succeeded in curbing inflation, which reached a two-year high of 6.69 percent in January, in part by capping the retail prices of gasoline and diesel to protect consumers from the increase in crude prices. The wholesale inflation rate dropped to 2.97 percent in October, the lowest since July 2002.

The Indian government caps gasoline and diesel rates to help keep inflation down and protect the poor, who make up half the country's 1.1 billion people. Gasoline and diesel prices were last changed on Feb. 15, when they were cut for the second time in 2 1/2 months. Cooking gas prices haven't been raised since November 2004 and kerosene since April 2002.

India recently went back to importing wheat (for the second time this year) in order to replenish depleted stockpile, and federal farm secretary P.K. Mishra has warned that India's harvest level may fall unless the main wheat-growing states receive more rainfall. If this happens India may need to import wheat for the third year in succession in 2008.

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