India's inflation drops to 3-year low of 6.6 per cent in January, adding to rate cut hopes

MUMBAI, India - India's stubbornly high inflation eased to a three-year low of 6.6 per cent in January, a glimmer of good economic news that adds to expectations the central bank will further reduce interest rates to boost slowing growth.

The wholesale price inflation figure released Thursday was down from 7.2 per cent in December, according to the Ministry of Commerce and Industry. January was the fourth month in a row that inflation has receded.

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The improved inflation picture gives the Reserve Bank of India more room to spur investment and spending, said Vidya Mahambare, an economist with the Indian rating agency Crisil. He said a fall in core inflation, which excludes volatile fuel and food prices, to 4.1 per cent is also reassuring for the central bank.

Worrisomely high inflation has been the main reason that the central bank has hesitated to cut interest rates to help revive Asia's third-largest economy.

India's economy is expanding at its slowest pace in a decade, with gross domestic product predicted to grow as little 5 per cent in the fiscal year ending in March. That's down from 9 per cent in early 2011, and it's paired with rising budget and current account deficits.

Many analysts say any interest rate cuts won't be large as inflation is still higher than the RBI would like. The bank has pledged to bring wholesale inflation down to below 4.5 per cent.

Manufactured goods led the drop in overall inflation, with price rises slowing to 4.8 per cent in January over a year earlier. Fuel and power costs were up by 7.1 per cent, but that was down from 9.4 per cent in December.

However, there were sharp increases in food costs. Overall food prices rose 11.8 per cent in January, the highest increase in six months. Pulses were up 16.9 per cent and potatoes surged 79.1 per cent.

"Food inflation remains high, which is not good news for the majority of Indians for whom expenditure on food is a major part of their budget," said Mahambare,

About 69 per cent of India's 1.2 billion people live on $2 or less a day, the World Bank estimates. Lifting its population out of poverty is one of the main reasons India needs faster economic growth.

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