Economy: January Inflation plunges sharply; March to see another CRR cut - Karvy Stock Broking

- January inflation plunges sharply to an over 2 year low of 6.55%, primarily underpinned by strong harvest helping food inflation to decline sharply apart from the significant base effect. However, the dip also is felt across the board.

- The policy bellwether core inflation falls finally to less than 7%, but more cheeringly, monthly momentum has shown signs of abating - a pleasant change from the past few months. However, inflationary expectations remain unhinged at more than 13% as on Dec'11.

- Input prices pressure are likely a reflection of a still relatively weak INR, and thus may pressure output prices further to undo softening in global commodity prices. Plus, firming up of crude provides no respite.

- Revisions are back in action: November inflation is revised up by 35bps, with core revising up whopping 43bps.

- Don't be fooled by the statistical anomaly of favorable base effect; Watch out for the sustained slowdown in sequential momentum. We are far from being out of the woods yet.

- Despite little overstated IIP slowdown, inflation continues to remain a pain for the policymakers. With expectations of pressure on imported and manufacturing inflation remains on the upside owing to confluence of both demand side (overstated slowdown) and supply side constraints (lack of industrial capex rebound), RBI is not likely to rush into a policy rate cut.

- While inflation likely to close the year at around 6.5%, inter-bank liquidity pressure are likely to remain in place despite consistent OMOs, giving leg room to the RBI for another 50 bps CRR cut in March. This is largely backed by the RBI's change in stance to use CRR as a liquidity tool.

- However we continue to expect the RBI to be little wary of touching the policy rates as yet. The pace of policy rate cut would be contingent on the extent of fiscal consolidation, evolution of the core and headline inflation once base effect wears off and global commodity prices driven imported inflation.

Source : Equity Bulls

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