February inflation within RBI's comfort zone

But the central bank is unlikely to act on rates as core inflation remains sticky, feel observers

Inflation has cooled in February. Both Consumer Price Index-based inflation (8.1 per cent) and Wholesale Price Index-based inflation (4.78 per cent) declined due to lower food prices during the month. After staying elevated and in double digits for long, inflation seems to be moderating. But it isn’t reason enough to cheer or call for a cut in interest rates. The WPI has averaged 5.94 per cent between April 2013 and February 2014, compared to 7.54 per cent in the year-ago period. Even the CPI is near the Reserve Bank of India (RBI)’s target of eight per cent by January 2015.

So, is the battle against inflation won and the rate cycle ready to turn? Not yet. While economists believe further rises are unlikely, a rate cut might not be on the cards for several reasons.

For starters, core inflation (excluding food, fuel and light) has moderated only marginally, from 8.2 per cent in November to eight per cent, while the headline CPI print is down from 11.2 per cent to 8.1 per cent. Also, prices of pulses, milk and fruit have increased sharply over the past four months. According to CRISIL Research, sustaining CPI at these levels will be crucial, given the upward momentum in inflation of certain food categories. Core WPI inflation also edged up in February to 3.15 per cent from 3.04 per cent in January. The rupee’s depreciation has impacted the prices of metals and chemicals, contributing to the rise in core inflation.

Though the CPI has fallen ahead of RBI’s expectation, core inflation is decidedly sticky. Economists believe any relaxation in rates or a pick-up in growth would fuel a price rise. According to Indranil Pan of Kotak Mahindra Bank, stickiness in core inflation implies the chances of demand-led inflationary pressures are still high. “Our output gap estimate hints that even with the anticipated marginal growth pick-up, inflationary pressures can be significant,” he said.