Mumbai: Terming the consumer price index based inflation as critical to assess the domestic economy in the current environment, a research report by Morgan Stanley said the CPI reading is likely to moderate to around 7 percent by March from the present level of 10.9 percent.
"We expect the CPI inflation to moderate from 10.9 percent currently to around 7 percent by March," the report said.
Giving the rationale behind such moderation, the report said factors like impact of slower government spending, slow rural wage growth among others, would help in reducing the sconsumer inflation.
"Since last September, total government spending has been on a decelerating trend. Moreover, the government has controlled expenditure except interest and subsidy payments... as the government delivers fiscal consolation, it will help contain aggregate demand- thus reducing inflationary pressures," the report said.
It further said agricultural wages have shown signs of moderation, which would help in easing inflation pressure.
"We believe this moderation, after almost five years of acceleration, will also help to lower food production costs and bring about a moderation in food and hence overall inflation," it said.
The report also said that other factors like slower rise in global commodity prices like oil, moderation in asset prices such as housing and slower growth in domestic demand would also help in containing CPI inflation.
"We believe that the sharp slowdown in domestic demand will finally start weighing on CPI inflation trend over the next six months," it said.
Referring to high current account deficit and fiscal deficit coupled with slowing growth, the report said that despite growth concerns, the worst may be behind.
"Though trailing macro data points are a cause of concern, we believe that the worst may be behind with regard to macro stability indicators.
"The government has initiated steps to correct the bad growth mix (high fiscal deficit and low investment spending). We believe this will help to gradually improve the macro stability indicators," the report said.