Dec 2011 headline inflation numbers much better than expected

The Dec 2011 inflation figure has eased off considerably to come in at 7.47% as against 9.45% in Dec 2010. In fact, the figure is also much lower than that of 9.11% recorded in Nov 2011.

While Primary Articles' inflation retreated sharply on a monthly basis. Primary Articles' inflation eased considerably to 3.07 per cent from 8.53 per cent last month. This was majorly on the back of a sharp decline seen in the Food Articles category, which came in at 0.74% as against 8.54% in Nov 2011.

Fuel & Power and Manufactured Products' inflation also saw an easing trend from Nov 2011. The inflation for Fuel & Power also decreased from 15.48% to 14.91% due to a 3% decline in the prices of petrol. The inflation for Manufactured Products eased off marginally to 7.41% as against 7.7%. However, this 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 of various industries. The RBI might have to keep a close watch on the demand side in the buildup to its policy review.

After hovering stubbornly above the RBI’s comfort zone at levels of around 9% for the past 12 sequential months, inflation has finally eased off. This has created some headroom for the central bank to consider a reversal in its interest rate cycle and to take measures to infuse growth and revival in the economy.

We, at DSIJ, expect the RBI to initiate a reversal in the interest rate cycle in its policy review on Jan 24, 2011. The central bank may either cut back on the CRR or the repo rates, which would greatly help in providing fresh impetus to the market sentiment.