Wednesday, January 15, 2014

India's Inflation Eases Slightl

Data released late Monday showed India's December consumer price index (CPI) inflation slowed to 9.9% on-year, down from 11.2% in November and back to the underlying trend. The downward correction was more significant in the urban areas with inflation at 9.1%, the weakest pace in over 20 months, while the rural
consumers’ index was slightly weaker.
The unseasonal spurt in the food price index (mainly the vegetables component) pushed up headline CPI inflation to average 10.7% between October to November, which has now ebbed on the arrival of winter crops and stepped up supplies. The food and beverages index, while still elevated at 12%, is down from 13.4% in the prior two months. Nonetheless this index is still punching above its weight, contributing to 60% of the December CPI, exceeding its weightage in the basket. Outside the food index, there was either a broad-based rise or a stabilisation in all the other sub-components.
The impact of a depreciating currency and the jump in vegetable prices should see inflation return back to trend, but not drift far from the 9.5% mark into the end of this fiscal year. The gradual adjustment in the fuel prices and anticipated increase in utilities are other watch factors on the horizon. In the immediate-term, the moderation in the headline CPI checks one of the boxes laid down by the central bank at the December policy review. With this pre-condition fulfilled, the Reserve Bank of India has the headroom to keep the repurchase rate on hold at the January 28 policy meeting, while still maintaining a cautious outlook on price developments.
With the administered product costs also being gradually adjusted up and improved agricultural output underpinning rural wages, concerns over entrenched inflationary expectations persist. Another important ingredient is December wholesale price index inflation, which will be released on Wednesday (delayed from Tuesday), where our estimate is for a 7.1% on-year climb.