Inflation headed to sub 5% levels

With the recent cut in fuel prices and CENVAT, the Inflation is headed towards sub 5% level. The move has direct impact to reduce inflation by 0.5 ppt; total impact may be about 1 ppt.

CENVAT reduction can lower inflation rate by 2.5 ppt on complete pass-through, but actual impact may be much less. The CENVAT reduction can lower the inflation rate closer to 7.0% by end-December, even assuming a moderate pass-through.

Strong base effects starting January 2009 may lower inflation to sub-six percent at the start of the new year. Inflation is likely to trend down to 4.0% by end-March 2009 with further downside risks to this number. One can expect inflation to continue to decline to around 1% by July 2009, unless global oil prices reverse before that or some new shock comes.