NEW DELHI (The Wall Street Journal) -- India’s inflation rate eased for the seventh straight week on Friday and some analysts said the country could witness a technical deflation by the middle of next year.

Inflation as measured by the Wholesale Price Index slowed to 6.61% in the week ended Dec. 13, compared with 6.84% in the previous seven days, data issued Friday by the Ministry of Commerce and Industry showed.
The reading was above the median 6.54% forecast by a Dow Jones Newswires poll of five economists.
Wholesale prices are rising slower than anticipated as the deepening global financial crisis saps demand for commodities and as the domestic economy slows.
The inflation rate may fall further in the coming weeks as the impact of a fuel price cut and tax reductions announced earlier this month seep into the economy, said analysts.
“We are expecting a negative inflation rate by July,” said Siddhartha Sanyal, an economist at Edelweiss Capital.
“There is a scope for a further fall in prices of most industrial commodities while another reduction in domestic fuel prices is likely in the first quarter of calendar 2009,” he said.
DBS Bank also expects the headline inflation rate to be negative by the middle of 2009 but Ramya Suryanarayanan, an economist with the bank, said India was unlikely to witness a deflationary spiral.
The index fell 0.2% to 230.7 from 231.1 the previous week, mainly due to lower prices of fruits and vegetables, edible oils and textiles.
The Wholesale Price Index, which measures producer prices, is used as a proxy for inflation as the government reports wholesale price data more quickly and comprehensively than consumer price data.
Softening inflation will give the Reserve Bank of India more headroom to slash interest rates aggressively, with the Indian economy looking set to expand at its slowest pace in six years in the current financial year.
India’s economy, the third largest in Asia, may grow at 7% in the current financial year ending March 31, 2009, the government said in its midyear economic review Tuesday.
The central bank has taken several steps in the last few months to boost the economy by improving liquidity and making available cheaper credit.
It has slashed the proportion of deposits banks have to set aside as cash by 3.5 percentage points to 5.5% since early October. It has also cut its key lending rate, or repurchasing rate, by 2.5 percentage points to 6.5%, and borrowing rate, or reverse-repurchase rate, by a percentage point to 5%.