January inflation eases to 2-year low at 6.55% MoM

Well it's good news. January wholesale inflation has eased to 6.55% (MoM) against 7.47% in the last month. This is in-line with estimates as according to a CNBC-TV18 poll it was seen at 6.53%.

Headline inflation slowed to its lowest level in more than two years in January as food prices fell, increasing the pressure on the central bank to cut rates to battle the country's economic slowdown.

Slowing inflation is good news for Indian policymakers, who have been struggling for two years to rein in prices.

C Rangarajan of PMEAC believes the environment is conducive for a change in policy stance. "We will need to look at the trajectory of manufacturing inflation," he says adding, "the prices coming down in that space is very encouraging."

He says the inflation is likely to remain stable at current levels or thereabouts.

The Reserve Bank of India is widely expected to start cutting interest rates in the quarter beginning April 1, as it looks to stimulate an economy that is headed for its slowest growth in three years. The central bank had a 20-month tightening cycle that ended in October.

Economists expect the RBI to cut its policy rate by 100 basis points from the current 8.5%  in 2012, with a cut of 50 basis points in the April-June quarter.

India's federal bond yields and swap rates fell after the data. The benchmark 8.79%, 2021 bond yield fell 2 basis points to 8.18%.

The benchmark 5-year swap rate fell 3 basis points to 7.28% and the 1-year swap rate dropped 5 basis points to 8.04%.

Here is a snapshot:

• Jan primary articles inflation at 2.25% Vs 3.07% (MoM)
• Jan WPI primary articles index up 0.5%
• Jan food articles inflation at -0.52% Vs 0.74% (MoM)
• Jan food articles index down up 0.3% (MoM)
• Jan fuel group inflation at 14.21% Vs 14.91% (MoM)
• Jan fuel group index up 0.1% (MoM)
• Jan manufacturing products inflation at 6.49% Vs 7.41% (MoM)
• Jan manufacturing products index :: Up 0.4% (MoM)
• Jan all commodities index up 0.5% (MoM)

Worries persist

Annual food prices in January fell 0.52%  from 0.74% rise in December, helped by improved supplies of vegetables.

However, prices of protein-rich food items such as eggs, fish and meat, milk and pulses remained high, suggesting that food inflation remains a potential problem area.

Manufacturing inflation, a barometer for demand-driven price pressures, dropped to 6.49% from 7.41% in December.

Fuel prices rose 14.21% from a year earlier, compared with an annual rise of 14.91% in December.

Fuel inflation has been steady, as political considerations have forced the government to delay an adjustment in petroleum and coal prices.

Any government move to align domestic petroleum prices with global prices to reduce its massive subsidy bill runs the risk of igniting inflation.

A decision on petroleum subsidy reforms is expected after the conclusion of a series of state elections being held between now and early-March.

Risks

In keeping its policy rate unchanged last month, the RBI cited risks to inflation from global crude oil prices and the weak rupee, as well as India's yawning fiscal deficit.

The rupee fell nearly 16% last year against the dollar, before rebounding somewhat this year.

The fiscal deficit, however, is widely expected to be almost a percentage point higher than the government's target of 4.6% of gross domestic product for the fiscal year ending March 31, largely reflecting a slowdown in economic growth.

The government said last week that it expects the economy to grow 6.9% in the current fiscal year, the slowest growth in three years.

Policymakers have blamed the euro crisis and high interest rates for the loss of growth momentum, but analysts also point the finger at the government's own policy paralysis as a major factor in discouraging investment.

Also watch the accompanying video for analysis of CNBC-TV18's Latha Venkatesh.

(With inputs from Reuters)