Published: Wed, March 14, 2018
Life&Culture | By Rose Hansen

India preview: Inflation to surprise Reserve Bank with another slowdown

India preview: Inflation to surprise Reserve Bank with another slowdown

In December, the index of industrial production (IIP) grew 7.1%, while consumer price index (CPI)-based inflation had slowed to 5.1% in January.

The index for all items less food and energy increased 0.2 percent in February following a 0.3-percent increase in January. For core CPI, we expect some reversal of the strength in January and forecast an increase of 0.1% m/m and 1.7% y/y.

Tame core goods prices (only 0.1% this month, and -0.5% yr/yr) continue to keep inflation at bay, a reflection of the remaining global economic slack offsetting a tightening U.S. economy.

In this fiscal to date, CPI inflation averaged at 3.5%, a sharp slide from 4.6% for the same period in fiscal 2017.

Fuel inflation, calculated by adding petrol, diesel, fuel and light components, eased to 5.9% from 6.4% in January. It estimates the headline inflation for financial year 2018-19 at ahigh 4.6 per cent on rising consumption demand, house rent allowance revisions and elevated crude prices.

The Bureau of Labor Statistics released the February Consumer Price Index data this morning. The RBI targets inflation over the medium term at 4% with an upper limit of 6% and a lower threshold of 2%.

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This was the fear at the end of January and upon Fed Chair Powell's first congressional hearing on February 27th where he was considered outspoken and hawkish.

The country's industrial production, however, rose by 7.5% in January, backed by growth in manufacturing, consumer and capital goods sectors. But this could normalize towards 4-4.5 percent range post monsoon, it said.

These were partly offset by a decline in medical costs, with hospital care and prescription drugs both falling in addition to a 0.5 per cent drop in mobile phone plan prices, the second monthly decline in a row.

The S&P 500 and the Dow slipped on Monday as the USA tariffs signed into law last week weighed on industrials, while a rise in tech stocks boosted the Nasdaq to a new record high. The food index was unchanged in February, as a decline in the index for food at home offset an increase in the food away from home index. It had increased its inflation projection to 4.3-4.7% in H2FY18 as compared to its earlier projections of 4.2-4.6%. January's increase was also revised lower from 2.9 percent.

Nevertheless, the recovery from the cash ban and the chaotic introduction of the consumption tax a year ago has been uneven.

Furthermore, while the S&P lags its all-time high by 3.3 percent, the small cap and domestic focused Russell 2000 trails its by only 1.4 percent.

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