Consumer price inflation set to see upside pressure: Crisil

Mumbai: Even as consumer price inflation (CPI) has come down due to a dip in food inflation and Index of Industrial Production (IIP) also seen a slip as a fallout of demonetisation, the former could see upside pressure hereon, Crisil said today.

CPI inflation could see upside pressures hereon as some benefits from a high-base effect will begin to wear out and as the imported component of inflation nudges up, the rating agency said in a report.

CPI softened 20 basis points to 3.2 percent in January from 3.4 percent in December, primarily because of a 70 bps drop in food inflation. IIP fell by 0.4 percent on- year in December on the back of 2 percent contraction in manufacturing sector.

The fuel component of CPI rose afresh on rising crude oil prices and weaker rupee. Meanwhile, the persistent stickiness in core inflation is contrary to the refrain that demonetisation had materially dented core demand. Core inflation (CPI excluding food) rose to 5.1 percent in January from 5 percent in December, the report said.

For the fiscal so far (April to January), overall CPI at 4.7 percent is 20 bps lower than in the comparable previous period, while food inflation is down 11 bps to 4.7 percent, and core inflation unchanged at 4.9 percent.

While IIP, as per the report, had failed to capture the impact of demonetisation in November owing to base effect, the latest number does so.

That said, mining and electricity sectors managed to display healthy growth of 5.2 percent and 6.3 percent, respectively. When viewed from the user-based classification, the biggest negative contribution to IIP growth came from the consumer goods segment, the rating outfit maintained.

The Monetary Policy Committee (MPC) review of February 8 reiterated its medium-term inflation target of 4 percent. Given the inflationary pressures in the economy, policy space now remains constricted, it said, adding the repo rate was accordingly left unchanged at 6.25 percent, and the monetary policy stance was shifted from 'accommodative' to 'neutral'.

As per the report, that could very well mark the end of the current rate cut cycle, which began in January 2015 - at least in the near term. The shift reflects the central bank's decision to exert caution on the inflation front in its journey towards the medium-term inflation target, it said.