- There were no surprises in the Mar inflation data.  Headline inflation continued to ease asexpected, moderating from 2.2% in Feb to 2.1% yoy in Mar (OSK and consensus:2.1%). In Mar, food prices (the largest component in the CPI basket at 30%)rose by 2.9% yoy, unchanged from Feb, while housing and transport cost (38%combined weightage) moderated a tad by 1.8% and 1.3% respectively from 1.9% and1.4% in Feb. The rest of the components in the CPI basket also rose at a slowerpace in Mar as compared to Feb, with furnishing and healthcare costs being theexception.

- We think that inflation should moderate for the full-yearon the back of base effects, coming in at 2.7% versus 3.2% in 2011.  However, there are upside risks to ourforecast, particularly from the impact from civil servant pay hikes, fuelsubsidy cuts (probably coming after the general elections) and implementationof minimum wage.  These could add 100-150bps to our baseline forecast. 

- As for policy, we expect the easing inflationary trend toprovide some room for the central bank to keep policy rates on hold for atleast the first half of the year.  Wethink that rate cuts are not likely unless the external environmentworsens.  However, given the build-up ininflationary pressure on the back of strong public spending and privateconsumption, as well as the possible further upside to inflation (as discussedabove), the bias is tilted towards the normalization of rates.  We think that a hike of at least 25 bps inthe OPR sometime in the latter half of 2012 is possible.

Source: OSK188