While CPI inflation has moved downwards, the RBI needs to feel assured that this trend will continue to persist before cutting rate-Care Rating

The rate of inflation in January'14 (y-o-y) based on provisional monthly WPI data, has dropped to a low of 5.1% (7.3% last year). Inflation in December'13 stood at 6.2% as against 7.3% during the corresponding month of the previous year. The decline in headline inflation came in much below the market expectations and in continuation with its downward trajectory for the second consecutive month from 6.2% in December'13 to 5.1% in January'14. However, while overall inflation eased during the month on account of falling food prices, inflation in fuel & power segment increased marginally. The RBI has already indicated that it would be targeting CPI inflation in the context of monetary policy and hence while this WPI inflation number will provide comfort, it may not be quite decisive in driving any interest rate action. Build up inflation rate in the financial year so far (April - January) stood at 5.2% as against 5.8% in the corresponding period last year. Most of this build up inflation has been contributed by primary articles (7.1%) and fuel & power (11.1%). However, build up inflation for manufactured products have declined to 2.6% as against 4.1% in the previous year. Monetary policy action Subdued industrial output and consequently lower economic growth so far does warrant a rate cut. However, with the tapering programme of the Federal Reserve having commenced and likely to continue, there will be the tendency for rates to be held at the current levels to attract foreign funds in the debt segment. Further, while CPI inflation has moved downwards, the RBI needs to feel assured that this trend will continue to persist. With the rabi crop expected to be good this year, one may expect further moderation in food prices. Therefore, price trends need to be evaluated more closely for the next two months too in order to pick up some hints on future price movements as well as inflation expectations.

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