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Inflation in Jan declined markedly to ~6.6% YoY from ~7.5% in Dec, reflecting not just high base effect but receding price pressures as well. Adjusting for seasonality and base effect (MoM SA, 3MMA), the data illustrates an apparent moderation in manufacturing inflation in recent months. Indeed, our re-arranged WPI basket also shows that the demand driven inflation has eased substantially, reaching its historical average. Meanwhile, the imported inflation has also lessened somewhat, but still remains elevated steered by fluctuations in INR and commodity prices. In the coming months, we see the headline inflation hovering at current levels. The primary articles inflation is likely to normalize to 6%-7% in coming months from unusually low levels at present. This rise, however, will be negated by a further decline in core inflation amidst falling demand pressures and high base effect. As regards monetary policy, such a trend of easing price pressures should give the RBI confidence to move further on its path of reversing the monetary cycle. Therefore, given the tight liquidity deficit conditions, we expect another CRR cut by the central bank in March though as of now, a repo rate cut remains a close call with the RBI keenly watching the incoming data, particularly Q3 GDP, to assess the deterioration in the growth momentum.
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