India’s annual consumer price inflation eased to a lower-than-expected 5.18 percent in February from a year ago, helped by a fall in food prices, government data showed on Monday.
“The reading for inflation and IIP (industrial output) appears to have created some headroom (for a rate cut).”
“A rate cut before the April policy was not expected because a lot depends on the Federal Reserve meeting on March 15-16, as that will be a very critical event for the market”.
“The numbers are relatively better than market expectations, mostly due to a drop in food prices including vegetables and pulses.
“While this probably provides the scope to RBI for, at last, a 25 basis points drop in rates on April 5, going forward evaluation of inflation will be more with respect to how core inflation behaves.
“We expect inflation to remain relatively sticky at 5.2-5.4 percent with monsoon and core inflation likely to play a critical role going forward.”
“Softer-than-expected headline inflation was largely led by disinflation in the food component, much like the WPI reading earlier today.”
“Further disinflation from these levels will be a challenge amidst expectations of a pick-up in aggregate demand conditions, partial implementation of pay commission proposals and bottoming-out in oil prices.
“For now, with inflation readings well-below the central bank’s target, and the government delivering on its fiscal targets, the case for a 25bp cut at the April meeting remains on the table.”
“The CPI number was a positive surprise mainly because of food prices. Vegetable prices have come down sharper than anticipated. However core CPI has risen to 4.9 percent from 4.75 percent in the previous month.
“Overall we think this data is in line with RBI’s inflation trajectory for 2016/17 of 5 percent by March-end. We continue to expect a 25 basis points rate cut in April and pause thereafter as demand-side pressure from salary increases, fuel and services inflation is likely to prevent the CPI from falling below 5 percent.”
“Food prices have eased considerably, and even though there is uncertainty about inflation going ahead from monsoon, deflationary tendencies have become very acute.
“Given that the government has stuck to its fiscal consolidation, I hope the RBI will cut the rate by 50 basis points in April to have a material impact on the borrowing cost of consumers.
“When inflation conditions are benign and there is no danger of overheating, then it is the right opportunity for RBI to give a big boost to the economy.”
“This number will only boost confidence that a 25 bps rate cut is certain. The only question is whether he (RBI Governor Rajan) does it now or in the April policy.
“More or less this should be last rate cut until monsoon. If monsoon is good we can expect one more rate cut.”
Source : firstpost.com