CPI Inflation at 2 Yr. low
BY GAURAV KULSHRESHTHA | 20 FEB 2017
The January CPI data again accentuates the quandary of RBI w.r.t. the monetary policy setting. The divergence in headline and core CPI continues.
- The conspicuous divergence between the Headline and Core CPI trajectory continued in January. The headline CPI fell to a record low of 3.17 YoY, down from 3.4% in December led by a sharp consecutive decline in vegetables and pulses. In contrast, the core CPI and fuel inflation was flat to up. Fuel inflation (including transportation) firmed up to 4.5% YoY from 3.9% in December and core CPI ex-transportation was flat at 5%.
- The decline in vegetables was largely seasonal but pulses fell in anticipation of a strong Rabi output.
- The January CPI data again accentuates the quandary of RBI w.r.t. the monetary policy setting in the wake of sticky/elevated inflation in non-tradable services (e.g. education at 5.6%) even while headline and food inflation ease to record lows.
- Going forward, the CPI inflation trajectory will be driven by normalization of vegetable prices, moderation in pulses inflation considering 11% increase in Rabi acreage, notification of HRA allowances for central govt. workers and crude price trends.
- Given its commitment to achieve a durable 4% CPI inflation, the RBI’s February policy has signaled an interim pause in the rate cut cycle with a change in stance to “neutral” from “accommodative”. The scope for a rate cut will open up only when the forward CPI projection indicates a generalized drop below 4.5%, and global developments stay supportive. Citi economist expect RBI to stay put at least until the monsoon this year.
Citi economist expect CPI inflation to average around 4.8% - 4.9% in FY18 vs. 4.6% in FY17.