October headline inflation in line with street's expectations

The October inflation figures have come in marginally higher at 9.73%, as against 9.72% in September 2011. The headline inflation continues to hover stubbornly close to double digits, as the prices of food, fuel and manufactured goods put more pressure on the common man's pocket as well as on major sectors of the economy.

Among the main components of inflation, the inflation for primary articles and manufactured products eased slightly to 11.4% and 7.66% respectively during October 2011, from 11.84% and 7.69% during September 2011. However, the inflation for the fuel and power group increased from 14.09% to 14.79% during October 2011.

Within the fuel and power group, the inflation for coal was steady at 13.3%, but that for mineral oil and electricity increased from 17.53% and 2.04% respectively in September 2011 to 18.4% and 2.63% in October 2011.

Among primary articles, the inflation for non-food articles and minerals eased sharply to 7.71% and 20.39% respectively during October 2011, from 14.82% and 24.79% during September 2011. In contrast, the inflation for food articles jumped to 11.06% from 9.23% a month ago.

Within the manufactured products group, the inflation for food products and cotton textiles eased to 7.8% and 10.8% respectively during October 2011. However, that for chemical products, basic metal products and machinery & machine tools increased to 9.3%, 11.4% and 3.5% respectively during October 2011.

All in all, inflation levels continue to remains sharply above the RBI's comfort zone. The inflation has remained above the 9% mark for the last 11 months in succession up to October 2011, while it was above 8% for the 22 months before that.

Going forward though, we expect inflation to tame down a bit from November onwards. What we saw in October was majorly an effect of the festive season, where demand is usually high, leading to inflation.

What remains to be seen is the quantum of ease-out in inflation which will determine the RBI’s proposed monetary policy stance that is expected in December 2011. The RBI has hiked interest rates 13 times since March 2010 to tame inflation, and had recently guided that it may take a pause in its stance in the Q3 review, if inflation is well within its projections.

In conclusion, with the economy showing clear signs of a slowdown coupled with optimistic expectations of an easing inflation, we believe that the RBI might take a pause in its policy stance in December.