December headline inflation much better than expected

December headline inflation much better than expected

The December inflation has eased off considerably to come in at 7.47 per cent as against 9.45 per cent in December last year. In fact it has come much lower that the 9.11 per cent recorded in Nov 2011. While primary articles inflation retreated sharply on a monthly basis, fuel & power and manufactured products inflation also saw an easing trend from the month of Nov.

The inflation for primary articles eased considerably to 3.07 per cent from 8.53 per cent last month. This was majorly on the back of sharp decline seen in food articles category which came in at 0.74 per cent as against 8.54 per cent in Nov.

The inflation for fuel and power group also decreased from 15.48 per cent to 14.91 per cent due to 3 per cent decline in prices of petrol. The inflation for manufactured product marginally eased off to 7.41 per cent as against 7.7 per cent but still continues to remain a key concern as it hasn’t shown any major signs off cooling in the recent past, despite a visible downturn in manufacturing activity for various industries. This does emphasis the fact that RBI might have to keep a close watch on the demand side in the build up to its policy review.

After hovering stubbornly above RBI’s comfort zone at around 9 per cent levels, for the past 12 sequential months, inflation has finally eased off creating some headroom for the central bank t consider a reversal in its interest rate cycle and take measures to infuse growth and revive the economy.

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.