Inflation - Eases on lower agro inflation: Edelweiss

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Inflation in December declined sharply to ~7.5% YoY from ~9.1% in November driven by a sharp plunge in primary articles’ inflation on the back of favourable base effect and falling agro prices. Meanwhile, M-o-M, manufacturing and core inflation remained stable as the impact of decline in demand pressure was nullified by INR depreciation. Indeed, our realigned inflation basket also indicates that imported inflation in December increased while demand and agro inflation declined. Easing demand pressures corroborate the weakening consumption growth in the economy. Going forward, we maintain that the slowing economy should help trim core inflation as well. Admittedly, INR weakness may heighten imported inflation, but downward pressure on commodity prices amidst slowing global economy should limit its impact.

In terms of the monetary policy, RBI has already tempered down expectations of CRR cut on January 24. However, given inflation growth dynamics, we believe easing should commence from March.