Inflation fell to a nine-month low in mid-December, helped by cheaper fuel and lower factory taxes, and analysts saw it diving to around 2 per cent by March, freeing the Reserve Bank to cut rates deeply. Wholesale price index, the most widely watched inflation measure, rose 6.61 per cent in the 12 months to December 13, slower than 6.84 per cent in the previous week but a shade above a Reuters poll of 6.57 per cent.“It certainly means the second-round effects of the fuel price cuts and duty cuts are kicking in and inflation is also tapering off very fast due to the disinflationary effects of manufactured goods,” said Rupa Rege Nitsure, an economist at Bank of Baroda.“I expect inflation at 3 per cent by end-March 2009 and expect the central bank to cut interest rates by 100 basis points and reduce banks’ cash reserve requirements by 50 basis points.” In early December, the government lowered state-set prices of diesel and petrol and announced a 4-percentage point cut to value-added tax on a range of manufactured products.The government said this week the RBI had considerable scope for monetary easing next year and aggressive monetary action may be needed if the global downturn continued to hurt manufacturing and slow growth. This was India’s lowest reading since March 1, and inflation has now nearly halved from early August’s peak of 12.91 per cent.It is well within the RBI’s forecast of around 7 per cent for 2008-09 and some economists saw it falling below two percent by March-end. Most analysts now expect the central bank to cut interest rates by another 100 basis points, a sentiment echoed by a top economic adviser to the government this week.
