India Inflation – Headline down – Core still inching up

Headline WPI inflation in December decelerated sharply to 7.47% from 9.11% in November, the softest print since December 2009. The headline print was lower on account of a favorable base and sharp decline in food inflation (down 3.1% m-o-m). However, demand side price pressures continues to persist as reflected in the 0.6% m-o-m rise in manufactured products inflation to 7.41%.

Manufactured products inflation showed little signs of easing and remained at uncomfortably high levels. Manufactured products inflation came in at 7.41% in December. However, the moderation was on account of a favorable base as the index rose by 0.57% mom in December versus 0.14% in November. Within manufactured products, while all sub-indices other than ‘textiles’ and ‘paper and paper products’ rose, the greatest price pressures were seen in ‘non-metallic mineral products’ (2.03% mom), followed by
‘leather and leather products’ (1.23% mom) and ‘chemical and chemical products’ (1.04% mom).

Given the elevated levels of “core inflation”, we do not expect any policy rate cuts during the third quarter monetary policy review on January 24th 2012. The central bank, however, is likely to announce plans for further open market operations (OMO) to address the liquidity deficit in the system. With growth concerns outweighing inflation and headline inflation expected to moderate to 7% yoy by March 2012, the monetary stance of the RBI is expected to turn more accommodative and we see policy rate cuts from April 201.