Feb CPI rises to 5.37% on costly foods, Jan IIP at 2.6%

Experts now say an April rate cut is most unlikely now and the earliest one can expect the RBI to slash rate can't be before July.

"It is not such a comfortable number as to guarantee a rate cut in April specially since the Reserve Bank of India (RBI) has moved [recently]," JPMorgan economist Sajjid Chenoy said.

But going forward, inflation's trajectory may again edge lower as the base effect has run out, said Ashutosh Khajuria, President - Treasury, Federal Bank.

While SBI economist Soumya Kanti Ghosh said core inflation coming off was a positive development.

"From hereon you will have a favourable base effect and therefore March, April would have certainly a lower number if no external risks really play their role," he said.

Speaking about market's reaction to the data, Anand Tandon says: "I don’t know whether it will be a major negative but the fact that the trend is reversed a bit would certainly not be good news. This time when the market is looking for more positives than negatives this is one more drag on the market at least."

Read: Detailed experts' reaction on next page:

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Latha: First thoughts on the inflation numbers. The good positive trend has been broken because of the unseasonal rains. Is it ugly enough or is it noise which we can ignore?Chinoy: We now have more data about the new series than we did a month ago and what you see is in the past because the base effect has been kind of a steady acceleration the number was 3.3 then it went up to 4.3 then it went up to 5.1, it is now 5.4. From what you tell me however it seems that food is the culprit, core inflation may have come down slightly. So this in conjunction with the significant upwards surprise in IP makes the April meeting very interesting and is tossed up.5.4 is not such a comfortable number as to guarantee a rate cut in April specially since the Reserve Bank of India (RBI) has moved but the only solace here will be this is largely driven by food, core inflation at least continues to come down which will please the Central Bank.Latha: The food index has come at 122.6 for February. Overall index CPI has come in at a 119.7 which is only 0.2 above 119.5 in January. Should that be taken as any solace?Chinoy: I don’t think the monthly momentum actually is very favourable on a seasonally adjusted basis month-on-month because largely food prices the overall index is up one percent which is very large, the highest in the last six months.If you look at core inflation however again there are two stories here. The headline core has come down from 4.3 to 4.1 but because transport and communication with core captures diesel and petrol cut that biases the number. If you strip that out and get what we call a core core or really the underlying momentum, that has been quite stable at about 5.5 percent last month and 5.5 percent this month.Now above all of this you have to add on the fact that some of these prices will begin to inflect. So at the end of February you saw a six percent hike in diesel and petrol. You have seen freight charges go up, in the railway Budget you have seen service taxes go up. Given all of that the worry could be that inflation could pick up in the coming months.The only argument for a rate cut in April is if in fact you want to target lower terminal rate front load it, get it out of the way before the fed begins to move in the middle of the year. So that is the argument in favour of the April. Otherwise given that they have already moved 50 bps this kind of momentum and the risks that are looming would perhaps suggest that you stay on hold in the foreseeable future. Latha: This is the last number that the governor will have before the policy because the March number will not come up until April 12th so he has got all the data that he can possibly get on inflation. What is your comment on this 5.37 number itself and rate cut expectation?Ghosh: It is both a good and a bad number because the headline number has gone up and it is much more than the projections which we had so 5.4 percent is not all a comfortable number. However the good thing is that if my estimates are correct the core inflation has moved down to 4.07 percent so that means there is a 20 basis point decline in the core inflation.

It is largely a result of the increasing food prices and if the numbers which you gave are any indication, a part of the damage may have been already factored in the month of February. The only comfortable factor is that the decline in the core inflation will give and also the fact that you mentioned that service inflation is around 2.89 percent, last month it was around 2.7 percent odd so that remains completely flat.Taking all these factors into account I do tend to agree with Sajjid Chinoy that possibly April may not be the ideal month for going for a rate cut. May be the governor may want to see 2 or 3 prints in type of what is the exactly the food inflation is going in terms of the CPI traction and then take a action on the rate cut.Ekta: What is the versus figure for the core CPI that you are working with on a month-on-month basis because I heard you mentioned 4.07 percent what is that compare with?A: That was 4.27 percent last time so basically the core inflation possibly could reach the 4 percent mark in the coming days if the trends are any indication. Latha: What is your estimate of how the bond markets will react now? Were they at all factoring in an April cut and what do they do after this data?Khajuria: After Governor has already cut by 25 bps, the chances of April cut were not there. The probability had come down but then of course consumer price index (CPI) data. Index of Industrial Production (IIP) data and WPI data which is due to come on 16 th, Monday.

These were some things which could have accelerated the pace of cutting the rates but if you go by the numbers that have come out, if it is only because of milk products and vegetable, it is not that serious an issue or so. Cereals rising by two percent or so that would have the least impact on Wholesale Price Index (WPI) numbers at least. Of course these days RBI is looking at CPI more closely than WPI.Latha: Why would you worry about WPI at all? The RBI has made it pretty clear that they will watch CPI more closely.Khajuriya: Yes, you are absolutely right, they are looking more closely to CPI but WPI still is continuing and both are—WPI is trending the same way as CPI is moving. There is not much of a difference and the IIP number would be more crucial and there we see the 80 percent weightage segment has grown by 3.3 percent and that has brought in the total IIP number to be a respectable number and much above what the pollsters were talking about because from 0.5 percent as against that it has come to closer to three percent or so.

For bond market, these two numbers are not very favourable but then fact of the matter is, they don’t look at one particular month’s number or so. Overall the feel is that if we continue on the same –if the same path is traded then the adverse CPI and the IIP numbers are gradually getting over and this was the last in the series after December, January and February when you had the adverse base effect. From hereon you will have a favourable base effect and therefore March number coming in April would have certainly a lower number if no external risks really play their role. Latha: The inflation number has come in higher than expected at 5.37 percent. The expectation was between 5.2 and 5.26 percent. Your thoughts, will that be fresh negatives for the market tomorrow?Tandon: I don’t know whether it will be a major negative but the fact that the trend is reversed a bit would certainly not be good news. This time when the market is looking for more positives than negatives this is one more drag on the market at least.Ekta: Would you be buying the Bank Nifty?Tandon: I don’t think so. I don’t think the numbers are that dramatically different that it will drive the markets. So, the overall trend continues to remain wherever it is which right now seems to me a bit soft.