By Cherian Thomas Oct. 3 (Bloomberg) -- India's inflation slowed more than expected to a 13-week low, giving the central bank room to keep interest rates unchanged when it meets at the end of the month. Wholesale prices rose 11.99 percent in the week to Sept. 20 from a year earlier after gaining 12.14 percent in the previous week, the commerce ministry said in a statement in New Delhi today. Economists expected a 12.12 percent increase. Reserve Bank of India Governor Duvvuri Subbarao is under pressure to boost money supply as a local stock sell-off triggered by the global credit crunch has drained funds from the banking system, increasing borrowing costs. Subbarao is unlikely to yield as inflation is still double the central bank's target. ``Inflation is still at elevated levels,'' said N. R. Bhanumurthy, an economist at Institute of Economic Growth in New Delhi. ``Cuts in interest rates will come, but just not yet.'' The central bank has raised the cash reserve ratio, or the proportion of deposits that lenders maintain with it as reserves, by 400 basis points to 9 percent since December 2006 to contain inflation. The bank will release its next monetary policy statement in Mumbai on Oct. 24. The rate at which Indian banks lend to each other climbed to an 18-month high of 17.5 percent on Oct. 1 as investors hoarded cash amid concern the U.S. financial meltdown could tip the global economy into recession. Indian banks borrowed an average 413 billion rupees a day from the central bank in September, almost twice the amount in August, further indicating a shortage of funds in the banking system. Weaker Currency The rupee fell as the credit-market turmoil in the U.S. prompted overseas funds to pull out money from Indian stocks. Overseas investors have pulled out a record $9.22 billion since January, pushing the key stock index down by 37 percent. The rupee declined 16 percent this year and is the second- worst performer among the ten most-active Asian currencies excluding the yen. Indian companies including Alok Industries Ltd., Jaiprakash Associates Ltd. and Balrampur Chini Mills Ltd. had called for a cut in the cash reserve ratio to ease the credit shortage. The Reserve Bank in September announced measures to boost the supply of dollars in the market and curb exchange-rate swings. The central bank said it will sell dollars and raise rates on locally-held foreign-currency deposits. Central banks from Australia to Japan pumped cash into their money markets and promised to take more steps to alleviate a credit shortage after the collapse of some of the biggest banks on Wall Street, including Lehman Brothers Holdings Inc. The U.S. Senate this week approved a $700 billion financial- rescue package for the nation's lenders. Asia's central banks have already started to cut interest rates to spur growth. Taiwan reduced borrowing costs on Sept. 25, joining China, Australia and New Zealand in easing borrowing costs this month. To contact the reporter on this story: Cherian Thomas in New Delhi at cthomas1@bloomberg.net

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