Inflation to moderate to 5% in January: Morgan Stanley report

Retail inflation is expected to moderate and print at 5 per cent after rising consecutively for five months, helped largely by seasonal dip in vegetable prices, while trade deficit is also likely to improve, in January, says a foreign brokerage in a report.

Official data for consumer price inflation (CPI) for January, which stood at 5.2 per cent in December last, would be released by government tomorrow.

Interestingly, while Morgan Stanley sees improvement in both inflation and trade deficit numbers in January, it has flagged concern that "moderate risks to macro stability are emerging on account of the wider-than-targeted fiscal deficits".

According to the brokerage, the debate on the re-emergence of macro stability risks has intensified owing to the rising headline inflation, widening trade deficit and also the widening the fiscal deficit targets for both the current and next fiscals.

"Against this backdrop, the attention on the incoming monthly data will likely be on the inflation and trade deficit prints," the brokerage said in the report.

"We expect headline CPI inflation to moderate to 5 per cent year-on-year in January from 5.2 per cent in the previous month, after rising consecutively for five past months", it said.

As per the report, high frequency indicators suggest that food prices have come off sequentially, largely driven by a seasonal dip in vegetable prices implying that food inflation will also moderate on a year-on-year basis to 4.5 per cent from 5 per cent in December.

At the same time, Morgan Stanley expects the trade deficit to have improved to $12 billion in January from $14.9 billion previously owing to robust global demand.

"Exports likely continued to grow at double digits for the third consecutive month, supported by robust global demand and favourable base effects," it said.

The brokerage expects exports to grow at 16.8 per cent in January compared to 12.5 per cent in December.

It also noted that import growth is likely to have remained robust, growing at 19.2 per cent from 21.5 per cent in the previous month.

"Non-oil, non-gold imports (proxy for domestic consumption) is expected to have stayed strong at 24.6 per cent versus 12.8 per cent as domestic demand indicators such as car and two-wheeler sales growth was strong in the month," it added.