India's inflation slowed to 9.9%

Pressure to tighten policy eased.

According to DBS, data released late Monday saw Dec CPI inflation slow to 9.9% YoY, down from Nov’s 11.2% and back to the underlying trend.

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The downward correction was more significant in the urban areas at 9.1% - weakest pace in over twenty months, whilst the rural consumers’ index was slightly weaker.

The unseasonal spurt in the food price index, mainly vegetables, had pushed up the headline CPI to average 10.7% between Oct-Nov, which has now ebbed on the arrival of winter crops and stepped up supplies. Food and beverages index, whilst still elevated at 12%, is down from 13.4% in the prior two months.

Nonetheless this index is still punching above its weight, contributing to 60% of the Dec CPI, exceeding its weightage in the basket. Outside of the food index, there was a broad-based rise or stabilisation in all the other sub-components.

Passage of the impact from a depreciating currency and jump in vegetable prices should see inflation return back to trend, but not drift far from the 9.5% mark into the end of this fiscal year. Gradual adjustment in the fuel prices and anticipated increase in utilities are other watch factors on the horizon.

In the immediate term, the moderation in the headline CPI checks one of the boxes laid down by the central bank at the Dec’s policy review.

With this pre-condition fulfilled, the RBI has the headroom to keep the Repurchase rate on hold at the 28-Jan policy meet, whilst still maintaining a cautious outlook on the price developments.

With the administered product costs also being gradually adjusted up and improved agricultural output underpinning rural wages, concern over entrenchment of inflationary expectations remain.

Another important ingredient i.e Dec WPI inflation will be released on Wed (delayed from Tue), where our estimate is for 7.1% YoY.