India July inflation 6.9 pct, lowest in over 2.5 years

Fuel prices fell 1.5 percent in July from June; economic worries remain

India's July inflation was 6.9 percent, government data showed Tuesday, lower than expected thanks to softening fuel prices but still too high for comfort for India's central bank.

A CNBC-TV18 poll had forecast July inflation of 7.24 percent.

Tuesday's data is the lowest inflation has been since November 2009, according to FactSet data. Though that could indicate India's slowing growth has begun to erode demand, economists have expressed skepticism about the reliability of the numbers, which the government has a habit of revising upward.

"The breakup of the number is a little worrying," said Samiran Chakraborty, head of research at Standard Chartered bank in Mumbai. "We're seeing core inflation going up while food and fuel are coming off. It seems to be counter intuitive."

Fuel prices fell 1.5 percent in July from June, even as the price of Brent crude rose, he said. That fall was driven by a 10 percent drop in diesel prices, which are set by the government, and a 4 percent fall in petrol prices, which are also influenced by the government, the data showed. Falling vegetable prices also mysteriously helped check food price rises, despite double digit increases in the cost of potatoes and onions. A weak monsoon is likely to push food prices even higher going forward.

High inflation has made the Reserve Bank of India resist pressure to join other central banks in cutting rates. Growth in Asia's third-largest economy has plunged to a nine-year low, but the bank says it remains more worried about prices.

In July, the bank slashed its growth forecast for the fiscal year ending in March 2013 from 7.3 to 6.5 percent, which is still higher than most private sector forecasts. It expects inflation for the fiscal year to be 7.0 percent, beyond its targeted 4.0 to 4.5 percent.

With inflation running high and an outsized fiscal deficit, India has less room for stimulus measures to pump up the economy than it did during the 2008 global financial crisis.

Also on Tuesday, a Ministry of Commerce official said India's trade deficit for July expanded as merchandise exports plunged 14.8 percent from a year ago — their sharpest fall since April — due to weakness in Europe and the United States, the Press Trust of India reported.

Foreign investment in India has also plunged, as risk averse global investors hesitate to commit to a country making headlines for corruption scandals, policy paralysis and shape-shifting tax policy.

Foreign direct investment for the months of April and May fell by more than half from the year ago period, to 168.5 billion rupees ($3.2 billion).

The prior year it was 347.9 billion rupees ($7.8 billion), Ministry of Commerce data showed. Services, including financial services and outsourcing, attracted the most foreign money.


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