Experts remain upbeat on inflation; CLSA expects status quo from RBI in 2018

Benchmark indices reacted for a short period reacted positively to economic data that the government declared on Monday.

India’s retail inflation eased at 4.4 percent as prices of vegetables and other food and bevarages softened, data released by statistics office on Monday showed.

The rate of increase in price rise slowed for the second consecutive month after hitting a fresh high of 5.2 percent growth in December and 5.07 percent in January due to unusual pick-up in food prices and rise in domestic petrol and diesel prices.

Retail inflation, measured by Consumer Price Index (CPI) is the main price gauge that the Reserve Bank of India (RBI) tracks. February’s data is an indication that prices are at a safe distance from the apex bank’s upper tolerance level of inflation at 6 percent.

Meanwhile, riding on the back of robust manufacturing sector output, India’s industrial production sustained the growth momentum to rise 7.5 percent in January, indicating early signs of industrial revival.

Factory output grew at 7.1 percent in December, before hitting a 25-month high of 8.4 percent in November, last year, as compared with a modest growth of 3.5 percent during December, 2016.

Factory output measured by the index of industrial production (IIP) is the closest approximation for measuring economic activity in the country’s business landscape.

Brokerages expect inflation to remain muted and probably on the softer side. While, in case of IIP, they believe that the IIP data is a combination of favourable base and nascent recovery.

Brokerage: Citi

Citi believes that inflation could average around 4.6 percent in FY19. But this could normalize towards 4-4.5 percent range post monsoon, it said. The consumer price inflation could be below 5 percent for the next two months followed by a rebound to 5.8-5.9 percent.

Brokerage: JPMorgan

JPMorgan said that softening of inflation was almost entirely underpinned by food prices. It expects March CPI to soften further. But going forward, it expects inflation to inflect from April due to unfavourable base effects. Further, seasonal increase in food prices will impact inflation from April too.

Brokerage: Credit Suisse

The brokerage house believes that most month on month decline came from food, as expected. Further, it expects further moderation in food inflation. There’s downside bias to 5.1-5.6% inflation forecast for H1FY19 too, it said, adding that February CPI should put to rest concerns about upward spiral in bond yields.

Brokerage: Kotak

Kotak expects headline inflation to trend towards 5.6 percent by June 20108. Meanwhile, it said that IIP growth is reflecting combination of favourable base and nascent recovery.

Brokerage: CLSA

CLSA said that it expects RBI to look through such statistical effects. It also expects the central bank to maintain status quo through 2018.

Brokerage: Morgan Stanley