India's annual inflation rate eased to a 4- month low in mid-October and could be in single digits before the end of 2008, giving the central bank room to cut rates further to shore up growth, analysts said on Thursday.
The wholesale price index, India's most widely watched price measure, rose 10.68 percent in the 12 months to Oct. 18, below forecasts for a rise of 10.82 percent.
It was the lowest annual rate since May 31, the week before a hike in state-set retail fuel prices pushed inflation into double digits.
"Probably, the reading of November 29, we could see inflation touching single digits," said Shubhada Rao, chief economist at Yes Bank.
"The driver of inflation is now ebbing. The rapidly moderating inflation would give RBI more elbow room to ease monetary policy."
The policy focus has shifted this month from reining in inflation, which rose as high as 12.91 percent in early August, to ensuring financial stability and shoring up growth against the spreading financial crisis and the risk of a global recession.
The central bank has this month cut its main lending rate by 100 basis points and slashed the amount of reserves banks are required to hold.
The U.S. Federal Reserve cut its main policy rate to 1 percent on Wednesday to stave off the credit crunch. China cut rates on Wednesday, Taiwan and Hong Kong followed up with rate cuts on Thursday and there was speculation that Japan could follow soon.
At a review last Friday, the Reserve Bank of India (RBI) left policy unchanged so it could assess the impact of its earlier moves, dashing hopes in some sections of the market that it might act again swiftly to shore up growth.
The RBI did cut its 2008/09 economic growth forecast to 7.5 to 8 percent from around 8 percent. It expects inflation to be around 7 percent at the end of the financial year in March 2009.
Eight out of 10 economists polled by Reuters after the policy review expect the RBI to cut its key lending rate by 50 to 200 basis points by the end of the fiscal year and lower banks' reserve requirements to support growth.
"The inflation rate has come down much faster than anticipated. I think this will provide a strong case for the RBI to ease lending rates further and support the markets," Anubhuti Sahay, economist at Standard Chartered Bank in Mumbai said.
Indian financial markets were shut on Thursday for a holiday. On Wednesday, overnight lending rates jumped in a cash squeeze and bond yields fell on hopes of more steps to ease liquidity.
India has been particularly vulnerable to rising risk aversion among foreign investors. They have pulled $12.9 billion this year from the stock market, which has fallen 55 percent so far in 2008. It rose 47 percent in 2007.