Impact: Positive (interest rates), Negative (Consumer Demand, nominal GDP growth, Gross Tax Revenue (GTR))

Brief: The consumer inflation number for February, 2019 stands at 2.57%, which is in line with our expectations. It is worth noting that food prices were deflating by more than (-) 2% between November, 2018 and January, 2019. However, this has improved to (-) 0.66% in February, 2019. The inflation number for core categories has shown no signs of recovery as the category is decelerating for the past four months and has reached 5.07% in February. A weaker core number indicates sluggish consumer demand. Consequently, RBI may continue its accommodative monetary policy in order curb the downward trend in consumer demand.

The consumer inflation number (headline) for February, 2019 stands at 2.57%, which is in line with our expectations. The inflation print had reduced to an eighteen month low of 1.97% in January, 2019. With the improvement in commodity prices, we were expecting the consumer inflation to bottom out in January, 2019. Speaking of which, food articles are worth mentioning here as prices are deflating for over five months. We note that, even though, food price deflation was averaging at more than (-) 2% between November, 2018 and January, 2019, there is some respite however as the number has improved to (-) 0.66% in February, 2019.

Core inflation, on the other hand, has been languishing and is now showing a declaration trend despite remaining strong over much of the financial year. The inflation number for core categories has been decelerating for over past four months and has now reached 5.07% in February. A weaker core number indicates sluggish consumer demand. Additionally, on the non-core side, with the stabilization in crude prices, the fuel inflation has reduced to 1.2% in February, 2019. The category was recording an expansion of over 7% during the June to November, 2018 period, when supply side volatility was high. In turn, fall in fuel price has been supporting the core inflation.

With this situation in the background, our major concern pertains to waning consumer demand, which will translate into lower GDP growth in the coming quarters. Based on this understanding, we believe that the MPC may take advantage of the low inflation figures to shore up the market. Having said that, we call for further accommodation by the RBI/ MPC, which, in all likelihood, may frontload a rate cut in the next policy meeting.