Build-up to RBI Policy Review on January 24, 2011

The weekly WPI inflation data for the month of December have constantly shown a significant ease in trend, providing some respite to a battered and shattered economy. For a second consecutive week, food articles’ inflation has managed to show negative growth, with the latest set of data suggesting that food articles’ prices grew at negative 2.9 per cent for week ended December 31 as against negative 3.36 per cent in the previous week. The primary articles’ inflation rose marginally but managed to stay at 0.51 per cent as against 0.1 per cent in the previous week. The fuel and power articles’ inflation fell and stood at 14.45 per cent as against 14.6 per cent last week.

It has been seen that while primary articles’ inflation and food articles’ inflation fell considerably from 5.48 per cent and 4.35 per cent on December 3 to 0.51 per cent and negative 2.9 per cent on December 31 respectively, fuel and power have also shown some signs of abating.

Moving on, the next week is expected to be very crucial on the macro front as all eyes will be on the headline inflation data expected on January 16, which could provide vital cues on the RBI’s possible stance in its policy review scheduled for December 24, 2011. Judging by the steep fall in the WPI primary articles, marginal easing of WPI fuel in the month of December 2011 and maintaining similar inflationary projections for manufactured articles as seen in the month of November 2011, we expect headline inflation to come around 7.71 per cent for the month of December 2011. This is far less compared to 9.11 per cent seen in the month of November 2011.

Going forward, we expect the RBI to initiate reversal in the interest rate cycle at its policy review on January 24. The central bank may either cut back on the CRR or the repo rates, which would really help to give a new impetus to the market sentiments.