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20 September, 2014 23:30 IST
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RBI might bring forward a cut in Dec 18 meeting: Sonal Varma
Source: IRIS (15-NOV-12)
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WPI inflation moderated to 7.45% y-o-y in October from 7.81% in September, sharply below expectations, as lower agri-commodity prices and Rupee appreciation offset the impact of higher diesel prices.

Food inflation eased to 7.7% y-o-y in October from 8.5% in September due to lower prices of pulses, fruits and edible oil. More importantly, core inflation also eased to 5.2% y-o-y in October from 5.6% in September, largely driven by a sharp fall in basic metals prices and a stable inflation rate in most other categories.

Meanwhile, even as the full pass-through of the diesel price hike was incorporated this month, this did not translate into higher fuel inflation as prices of non-regulated fuel items such as aviation fuel and bitumen fell sharply. Elsewhere, August WPI inflation was revised up to 8.01% from 7.55%.

``Inflation data comes as a positive surprise and is consistent with the sharp fall in the output price index of the manufacturing PMI to a near two-year low in October. This PMI suggested that the pass-through of past imported cost increases had largely occurred,``  said Sonal Varma, economist, Nomura.

``Lately rupee has started to depreciate again, which signals that the pace of moderation may not be as steep in future. We expect core inflation to moderate further on a year-on-year basis due to base effects and lower cost pressures at the margin. Overall, inflation data suggest a considerable loss in inflation momentum and that the Reserve Bank of India`s (RBI) and our projection of 7.5% headline WPI inflation by March 2013 is very realistic, with some downside risks now,`` Varma opined.

``We continue to expect 50 bps worth of repo rate cuts in H1 2013, with the first coming in January, in line with the RBI's stated forward guidance. However, with inflation clearly below the RBI's stated trajectory, there is a chance that the RBI might bring forward a cut to the December 18 meeting. For now, we are stick to our base case view of a rate cut in January,`` Varma said.


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