Both retail and wholesale inflation fell to multi-month lows in December, suggesting signs of weakening economic recovery and slower inflation which provide room for the Reserve Bank of India’s (RBI) monetary policy committee to relook at its interest rates during the 7 February meeting. The Consumer Price Index (CPI) in December is at an 18-month low at 2.19%y/y while the Wholesale Price Index (WPI) decelerated to an eightmonth low at 3.8%y/y.

• The Consumer Price Index (CPI) in December is at an 18-month low at 2.19% y/y against 2.33% y/y in November, dragged by food prices. Meanwhile, the Wholesale Price Index (WPI) decelerated to an eight-month low at 3.8% y/y from 4.64% y/y in November dragged by fuel as well as manufactured items.

• Slower-than-expected economic growth reflected by the factory output growth i.e. industrial production (IP) that posted its lowest growth in 17 months to 0.5% y/y in November due to unfavourable base effect and contraction in manufacturing, added with weak inflation data have created room for the Reserve Bank of India’s (RBI) monetary policy committee to relook at its interest rates during the meeting on 7 February.

• We expect the RBI’s monetary policy committee to change the stance to neutral in the February policy meeting and remain on an extended pause on policy rates. Despite the sharp fall in petrol and diesel prices in December, core inflation (CPI) remained elevated due to the high sequential inflation seen in health and education sub-groups. Room for rate cut in February meeting cannot be ruled out as we expect further downside on average inflation at 4% in FY19, closer to the 3.5%–3.7% band.

Source: AmInvest Research - 15 Jan 2019