Indian headline inflation slows down slightly in January, RBI likely to keep repo rate on hold in 2018

India’s headline inflation slowed marginally in the month of January, against the backdrop of a seasonal correction in the perishable food items prices and a reduction in the Goods and Services Tax rate on several goods.

The consumer price inflation eased a bit to 5.07 percent year-on-year in January after rising to a 17-month high of 5.21 year-on-year in December. The fall in inflation was supported by a seasonal slowdown in the perishable food items’ prices. But the statistical effect on an unfavorable base kept the year-on-year print above 5 percent. On a month-on-month basis, the consumer price index dropped 0.22 percent in January after falling 0.29 percent in December.

Core inflation continued to be elevated at 5.14 percent year-on-year in January. In sequential terms, core CPI rose 0.48 percent in January, reflecting higher transportation and housing costs. Indicating the effect of a reduction in GST rates on several goods, inflation decelerated in the household goods sub-category.

“We remain cautious of several evolving upside risks to inflation, specifically, a potential slippage in FY2019 fiscal targets and the government’s decision to increase the MSP for all Kharif (summer) agricultural crops to 1.5 times the cost of production”, noted ANZ.

While the eventual effect depends on the design of the scheme, the MSP’s generally have a high correlation with the prices of agriculture products sold in the open market.

According to ANZ, the RBI might keep its policy repo rate at 6 percent this year to assist growth gain momentum. But the RBI’s rhetoric is expected to stay hawkish based on expectation that inflation would stay in the upper half of the central bank’s target band of 2 percent to 6 percent this year.

FxWirePro launches Absolute Return Managed Program. For more details, visit http://www.fxwirepro.com/invest