Consumer price inflation (CPI) turned around in February, picking up after nearly a year to 3.7% from 3.2% in January, led by higher food and fuel inflation. Meanwhile, core inflation stayed relatively sticky in the 5% zone, where it has been hovering for about 6 months now. Stickiness in the core will keep the central bank cautious of inflationary pressures, especially given the upside to domestic prices from rising global oil, commodity and agriculture commodity prices.
IIP partly shrugs
CPI inflation could see upside pressures thereon. This will be driven by rising global oil, commodity and food prices causing the imported component of inflation to nudge up. Also, as the economy is remonetized, some pent-up demand will have returned. We estimate CPI inflation to rise to 5% in fiscal 2018, which is within the broad range of 4+/- 2% set by the government but higher than the central value of 4% that RBI is targeting over the medium run. Bringing inflation within the comfort range will necessitate a tight fiscal stance, and perhaps a tighter - more disinflationary - monetary policy over the medium-term.
IIP partly shrugs off demonetization impactIndex of Industrial Production (IIP) expanded 2.7% on-year in January, after contracting by 0.1% (estimated earlier at 0.4%) in December, suggesting the impact of demonetization is waning and that remonetization is well underway and businesses may be back to business as usual. The growth, however, is also in part due to a favourable base effect as industrial activity had declined 1.6% in the same month last year. Despite this slight uptick in January, the overall industrial growth remains fragile.