Headline inflation drops to the lowest in 25 month

  • CPI inflation eased to 8.1% YoY (consensus: 8.3%, ICICI Bank: 8.1%) in February from prior reading of 8.8%. The drop in vegetable prices contributed ~58% of the drop in headline inflation.
  • Core inflation eased to 7.9%YoY in February as against 8.1% YoY in January
  •  The RBI is likely to keep the policy rate unchanged in April policy meeting

Inflationary pressure eases furt her in line with our expectation

The consumer price inflation maintain ed the downward trend for the third consecutive month and came at 8.1% Yo Y in February’2014, the lowest level since January’2012, when it clocked 7.6% YoY. The print is in line with our estimates but lower than market expectation of 8.3% YoY.

The drop in inflation is primarily on account of easing vegetable prices. Vegetable prices eased to 14% YoY in February from 21.7% YoY in January. The drop in vegetable prices contributed ~58% of the fall in headline inflation.

Food inflation drops to the lowest since March’2012

Food inflation, which accounts for ~50% of the headline inflation, dropped to 8.6% YoY in February vs. 9.9% YoY in January. While there were declines across various segments of the food component, the contribution from vegetables was significant. Food inflat ion (ex vegetables) declined to 8.0% YoY in February as against 8.5% YoY in January. Component wise, cereals, oil products, fish and meats and sugar witnessed lower inflation during the month of February.


Core inflation edged lower in February; fuel inflation remains at record lows

In an encouraging development, core CPI gave up its stickiness and edged lower to 7.9% YoY in February’2013 as against 8.1% YoY in the prior reading. Component wise, though housing inflation edged lower to 9.9% YoY in February (vs.10.2% YoY prior), clothing component witnessed some pickup in inflation (i.e. 9.2% YoY). Also, fuel inflation remained at record low of 6.1% YoY, maintaining fifth consecutive month of decline.


RBI to maintain status qu o in April policy meeting

The last policy statement read, “ the extent and direction of further policy steps will be data dependent, though if the disinflationary process evolves according to this baseline projection, further policy tightening in the near term is not anticipated at this juncture.” The macro backdrop of lower inflation and continued softness in In dustrial production data makes us believe that the RBI will keep the poli cy rate unchanged in the April policy meeting.