Dec inflation at 7.18%, lowest in a year; rate cut seen

Moneycontrol Bureau

The pace of inflation slowed down to 7.18 percent in December versus 7.24 percent in November, strengthening the case for the Reserve Bank of India to cut interest rates when it reviews the monetary policy on January 29. The latest inflation number is the lowest in a year, and less than the 7.3 percent estimated by a CNBC-TV18 poll. Bond yields declined to 7.85 percent in anticipation of interest rates falling and the rupee strengthened to 54.66 against the dollar.

But some economists caution that a rate cut at the month-end RBI meet may still not mark the beginning of a secular downtrend in interest rates.

“Underlying inflation expectations remain sticky as evidenced by high CPI (consumer price index) readings,” said Nomura economist Sonal Varma in her note to clients.

“The Reserve Bank of India (RBI) is likely to cut the repo rate by 25bp at its 29 January policy meeting. However, we do not see this as the start of a long rate cut cycle and expect a total of only 50bp cut in H1 as we expect inflationary pressures to re-emerge in H2,” the Nomura note said.

Core inflation moderated to 4.2% y-o-y in December from 4.5% in November, aided by lower momentum and base effects. However, food (primary + manufactured) inflation rose to 10.4% y-o-y from 9.0% as the seasonal decline in food prices was less than expected. Fuel price inflation eased to 9.4% y-o-y from 10.0%.

Meanwhile, retail inflation rose to 10.56% in December over 9.90% in November. India's retail inflation is the highest among the BRICS group of emerging economies - Brazil, Russia, China, and South Africa. Food prices for consumers rose 13.04 percent in December from 11.81 percent in November.

Sensex resumed its upward movement on lower-than-expected inflation number. The 30-share BSE benchmark was trading 150 points up in the afternoon trade.

Key takeaways from WPI:

• Primary articles inflation at 10.61% Vs 9.42% (MoM)
• Manufactured inflation at 5.04% Vs 5.41% (MoM)
• Fuel & power group inflation at 9.38% Vs 10.02% (MoM)
• Food Articles Index Down 0.5% (MoM)
• Non-food Articles Index Up 0.8% (MoM)
• All Commodities Index Down 0.1% (MoM)
• Minerals Group Index Down 1.8% (MoM)