MUMBAI (Reuters) - The annual consumer price inflation (CPI) eased more than expected to a 24-month low of 8.79 percent in January, while industrial output (IIP) contracted for a third consecutive month in December, according to data out on Thursday.
“The IIP data shows that growth is driven by basic and intermediate goods and suggests that the efforts of the government over the last 8 to 9 months to restart stalled projects is having its impact on the ground. This augurs well for the industrial production data going ahead from here.”
”January saw substantial easing in not just fruits and vegetable prices, but even in cereals and pulses due to improved agricultural supplies.
“Inflationary scenario is going to improve going forward. From the policy perspective 8.79 percent, CPI is still way above the central bank’s comfort zone. The central bank is unlikely to change its stance, the tightening bias will continue. RBI will remain hawkish with inflation on the watch before further moves.”
”I think we will continue to see some comfort on the inflation trajectory front in the next couple of months. But as Rajan has said we need to see easing in core inflation as well, which will be critical over the next few months.
“We have one more data point on CPI before the April 1 policy. The risk of a rate hike in April does not exist unless there is a very sharp negative surprise in core CPI data in the next reading in March.”
”The industrial production continues to be weak, and that is what this data is bearing out. As far as inflation is concerned, this is good news, and that trend will continue and the 8 percent target, which the central bank has set, looks achievable now.
“Food inflation has really moderated, so for the next one or two months we should see inflation remain down, while election-related spending will prop up CPI inflation. But one should also remember that demand itself is really weak in the system, and election-related spending could not completely offset the fall in inflation.”
”The central bank is likely to take comfort from the downside surprise in the headline CPI and, as flagged, a sub-9 percent could not be ruled out if food prices corrected by a bigger than expected margin. This has panned out as food price inflation has decelerated to single digits, a first in over one and a half years.
”Factoring in RBI’s guidance that CPI inflation will assume a dominant role in policy decisions and today’s sub-9 percent print, the policy stance is likely to be on pause into the new fiscal year.
”Stickiness in the core CPI reading, however, remains a cause for concern, and risks of action could stem from this data point, especially if inflationary expectations remain well-entrenched and unresponsive to easing headline inflation.
”Risks from the fiscal policy is limited for the Mar quarter as the challenging deficit targets need to be met and require significant compression in spending.
”In addition, with elections fast approaching and inflation highlighted as a key flashpoint, the political factions are unlikely to pile pressure on the central bank to give up the inflation fight. But upside risks to inflation might be revived if the new government steps up social spending post the May-elections.
Reporting by Swati Bhat, Abhishek Vishnoi, and Himank Sharma; Editing by Rafael Nam