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IIP and inflation numbers are in and expectations are for RBI to maintain status quo on rates.
India's flagging economy delivered some good news on Wednesday with a slight expansion of index of industrial production (IIP) and further cooling in consumer inflation, offering some respite to the ruling coalition before next month's general election. The next thought in the minds of investors is, 'the numbers are in, what next?'. Here is an outlook:
1. Continue to watch inflation
We maintain our close watch on core CPI inflation, which did soften but continued to exhibit some stickiness around 8%. Headline inflation fell further to 8.1% led by vegetable prices reduction (6.7% mom). Despite some growth slowdown in the services sector, services inflation remains sticky, indicating continuation of demand-side pressures within the services sector. We maintain our call of no change in either policy rates or RBI’s stance on April 1. The CPI inflation trajectory remains in line with our expectation and core inflation keeps it on a knife-edge.
2. Keep a watch on core inflation
Core CPI inflation fell marginally in February to 7.9% against 8.1% in January. The softening was led by ’housing‘ (9.9% against 10.2% in January) and ’miscellaneous‘ (6.9% against 7.1% in January) segments that represent broadly the services sector. However, the services sector slowdown is not reflected in the inflation movement indicative of wage pressures and other second round effects, which the RBI highlighted in the last policy round. We do not expect sharp decline in core inflation and estimate core inflation at ~7.5% by March 2015 (see Exhibit 1).
3. CPI inflation falls further due to vegetable prices
CPI inflation continued to moderate, printing 8.1% in February, lower than our estimate of 8.3%. The softening was largely due to vegetable prices continuing to witness significant corrections in February (in conjunction with winter crop arrival). Vegetables inflation was down to 14% from its peak of 61% in November 2013. This also helped cool off the February food inflation to 8.6% from 9.9% in January.
4. Trade deficit narrows but exports contraction is disappointing
February trade deficit improved to US$8.1 bn from US$9.9 bn in January, which places FYTD14 deficit at US$129 bn (28% lower than FYTD13). This was driven by (1) lower gold imports and (2) lower non-oil non-gold imports. Exports growth had been strong since July last year but contracted 3.7% in February. With global demand yet to recover, we continue to expect very modest