Key Points
Lower vegetable prices driving CPI inflation reduction
Edible oil prices softening globally
Improved crop production prospects
Budget announcements supporting supply-side dynamics
The Index exhibited a further downward momentum in January, dipping to 4 per cent on a YoY basis, moderating from 5.4 per cent in December.
On a sequential basis, the index declined sharply by 2.4 per cent, after a fall of 0.5 per cent in December.
"Edible oil prices were also lower. We, thus, expect a significant moderation in headline CPI in January. CPI inflation is expected in the range of 4.5-4.7 per cent," said the report.
The inflation outlook is evolving broadly in line with estimates, with significant support stemming from easing prices of vegetables.
Global prices of edible oils too have softened, which is positive for domestic inflation trajectory. Prospects of higher production due to improvements in sowing of pulses (up by 2.3 per cent) and wheat (up by 2.8 per cent) in the ongoing rabi season, bodes well for domestic availability of these crops.
Recent announcements in the Budget targeted at easing the supply-side issues related to oilseeds, pulses and vegetables and fruits should aid in preventing the sporadic food-price shocks which tend to unhinge the inflation outcome, according to the BoB Index.
"The inflation outlook is increasingly looking comfortable led by a broad-based softening in underlying price pressures," said Aditi Gupta, economist.
Prices of vegetables which had contributed to the sharp uptick in food inflation are witnessing a seasonal correction due to steady arrivals.
Even for cereals such as pulses and rice, the moderation in prices has been sustained owing to higher domestic production.
"As such, we expect the inflation trajectory to evolve broadly in line with expectations, with a possible downward bias. This along with a significant improvement in domestic liquidity conditions is likely to give the RBI room to cut rates when it meets this week," Gupta noted.
