Sharp dip in inflation makes room for rate cuts

NEW DELHI (Reuters) - Indian inflation dropped sharply to its lowest in nearly six months in early November as prices of metals and fuels fell, and analysts said the unexpectedly low figure gave the Reserve Bank room to cut rates.

The substantial easing in inflation comes at a time when Indian policy makers are struggling to protect growth and shield the economy from the impact of the global economic slowdown.

India's wholesale price index, the most widely watched inflation measure, rose 8.98 percent in the 12 months to Nov. 1, well below forecasts for a rise of 10.37 percent, data showed on Thursday.

It was the lowest reading since May 24, when the rate was 8.90 percent and well below early August's peak of 12.91 percent.

Analysts said a decline in global commodity prices, robust domestic agricultural output and a fall in demand in a slowing economy helped bring the rate to single-digits well ahead of earlier expectations.

"Taking comfort from the decline in inflation and responding to the worsening demand outlook, we expect the Reserve Bank of India to cut the reverse repo rate by 100 basis points and the repo rate by 150 points by March 2009," said A. Prasanna, an economist at ICICI Securities.

He said inflation was likely to ease to 4.5 percent by March 2009. The repo is the Reserve Bank's main lending rate while the reverse repo is the rate at which it absorbs excess cash from the banking system.

Strong evidence that India's $1 trillion economy, Asia's third largest, is slowing has emerged in recent weeks. Factory output has been sharply lower, manufacturers have trimmed output and put expansion plans on hold. Government excise receipts -- factory gate taxes -- contracted in October.