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March 12, 2017

Growth-inflation mix continues to improve

CPI slides to 4.4% on lower food and a stable core inflation


Consumer price index (CPI)-based inflation slid to 4.4% in February from 5.1% in January, marking the second consecutive month of decline. Food inflation fell nearly 150 basis points (bps) on-month, while core inflation was flat. Inflation in housing – the category that had rapidly been pushing up core inflation for the last 7-8 months – was stable at a high 8.3% for the month.


In this fiscal to date, CPI inflation averaged at 3.5%, a sharp slide from 4.6% for the same period in fiscal 2017. Most of the fall in inflation is on account of lower food and core inflation.


For next fiscal, CRISIL expects CPI inflation to perk up but stay benign and within the Monetary Policy Committee’s (MPC) projected trajectory. The MPC expects inflation to rise in the first half but moderate significantly in the second. Given this, CRISIL expects the repo rate to remain unchanged over the next six months unless significant upside risks to the MPC’s inflation forecast materialise.


We expect CPI inflation to average ~4.6% next fiscal. The pick-up will be due to rising consumption demand, impact of house rent allowance revisions on housing inflation, and higher global crude oil prices. Food inflation is likely to stay relatively soft given the expectation of a normal monsoon.


So far, inflation has stayed within the projected trajectory despite rise in the prices of oil, fruits & vegetables, and higher housing inflation. But inflation could mount if risks materialise. For example, higher minimum support prices (MSP) and increase in coverage of procured crops because of higher MSPs could influence food inflation. Secondly, firmer input costs can push manufacturers to raise prices in a scenario of stronger demand. On the downside, items of mass consumption could see softer prices if the latest downward revision in Goods and Services Tax rates on some items is passed on to consumers. The interplay among factors will therefore determine the pressures on inflation.