Soft inflation readings set the stage for Apr easing

Feb CPI and WPI inflation numbers undershot expectations. Feb CPI inflation eased to 5.2% YoY from Jan's 5.7% due to softer food prices, while core inflation ticked up. WPI inflation declined -0.9% YoY, in red for one and a half years, reflecting tepid manufacturing pricing conditions and weak tradable pressures.

Food inflation eased to 5.3% from 6.8% in Jan, with broad-based slowdown amongst the sub-components. Vegetables witnessed a sharp drop to 0.7% YoY from Jan's 6.5%, helped also by high base effects last year. Other animal protein costs, fruits etc also softened, with pulses up 38% YoY but off last year's highs.

In the meantime, notwithstanding low fuel prices, the transport sub-component rose on fading base effects. Core inflation (ex food and fuel) inched back above5% from Dec quarter's 4.6% as an uptick in education costs were offset by lower health services. Swings in food price readings have been the main driver behind Jan's firmer and Feb's (softer) positive surprise.

Underlying conditions signals towards a sequential easing in food prices, which is likely to bode well for the inflation outlook inFY16/17. We expect inflation to average 5.4% next year from an estimated 5%this year. For now, with inflation readings well below the central bank's target and the government delivering on its fiscal targets, the case for a 25bp cut at the April meeting remains on the table.

A pause is on the cards thereafter as further disinflation to keep inflation below 5% (Mar17 target) will be a challenge amidst expectations of a pick-up in aggregate demand conditions, partial implementation of pay commission proposals and stabilization in oil prices. Aggressive rate cut expectations are therefore unlikely to be entertained. Plans to amend the RBI Act will also finalise the formation of the monetary policy committee later this year.

The panel is set to include three members nominated by the government and rest from the central bank, including the Governor. The latter will head the panel and have the casting vote. This panel is expected to replace the current arrangement where the Governor and the internal team have a final say on the decision and are not obligated to follow the recommendations of the Technical advisory team.

Source : Equity Bulls

Keywords