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Economy Update: Inflation below 4%

Economy Update: Inflation below 4%
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First Published: Fri, Feb 20 2009. 09 45 AM IST

Updated: Fri, Feb 20 2009. 09 45 AM IST
For the week ending 7 February ’09, headline inflation (wholesale price index, WPI) dropped to 3.92%, below our estimate of 3.97% and consensus’ 4.01%. The significant fall from the previous week (4.39%) is due to the base-effect.
The primary article index fell, but food articles such as cereals, pulses, fruits and vegetables rose. Other food articles and non-food articles recorded drops.
The fuel index has risen – fuel deflation stood at -3.03% as against -3.84% the previous week.
The w-o-w fall in inflation was largely due to a fall in prices of manufactured items. Metal products, textiles and machinery were the major components that softened. Food products, however, remained high.
The significant fall in inflation over the previous week (4.39%) is due to the base-effect. We, however, remain concerned about food articles (cereals and pulses) as they show no signs of correcting. We reiterate our call that India would witness deflation during May-Oct ’09.
Outlook
Given falling inflation, softening industrial production, slumping foreign trade and the government’s advance estimate of FY09 GDP, we expect monetary easing soon.
Our 12-month view: cuts in the repo / reverse repo by 150bps, and in the CRR by 200-250bps. By end-March ’09, we expect some cuts in the repo / reverse repo of around 50-75bps, and in the CRR of 50-100bps.
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First Published: Fri, Feb 20 2009. 09 45 AM IST
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