India's inflation, which had increased to 13-year highs (10.72%), fell unexpectedly to single digits (8.98%), opening the door to more aggressive rate cuts to boost its flagging economy. The prices have been pulled down by decreasing fuel and metal prices.
The drop in the Wholesale Price Index, the most watched cost of living monitor, was far bigger than expected by economists, who had forecast inflation of around 10.3 percent. Inflation was at 13-year highs of nearly 13% in August, but has been declining as commodity prices decreased and consumer demand dropped amid the global financial crisis. It has fallen faster than expected, giving the central bank leeway to more "aggressively" cut rates to spur the stumbling economy. The central bank has cut its key short-term lending rate, the repo, for the second time in two weeks to stimulate the economy. The repo rate is at 7.5 percent, still high by world standards. The rate is still robust compared to Western levels, but economists say India needs to grow by double-digits to alleviate desperate poverty.
The inflation drop came as a big relief for the Congress-led government which has been desperate to tame prices, fearing a voter backlash in national elections due by May 2009. Congress has suffered a string of state poll defeats and inflation, which has hit India's poor masses hardest, has been blamed as a key factor. It faces a new set of state polls starting this weekend seen as a mini performance referendum.
Until recently, India believed it would be relatively unharmed by the global turmoil thanks to its vast domestic market of 1.1 billion people and small trade exposure. But recent data has shown that this is not the case.
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