CPI Inflation numbers today! Good news for common man in offing?

The Central Statistics Office (CSO) will be presenting India's Consumer Price Index (CPI) or retail inflation data for the month of December, 2018 anytime today. Ahead of the announcement of the CPI numbers, the benchmark indices are in bloodbath with Sensex trading at 35,757.36 down by 252.48 points or 0.70% and Nifty down 87.45 points or 0.81% at 10,707.50-mark by 12:38 hours. Interestingly, the December data will be taken into consideration by the Reserve Bank of India (RBI) during February 2019 policy to provide the country's monetary policy stance. 

CPI Inflation has been easing since past two months, eliminating the outcome of rate hike ahead by RBI. In the month of November 2018, the CPI came in at 2.33% lower compared to 3.38% in October 2018. 

Shilan Shah, Senior India Economist at Capital Economics said, "This pushed it further below the RBI’s 4% target, but core inflation remained close to its highest rate in four years."

Talking about December 2018, Shah said, "The recent weakness of headline consumer price inflation, which we think dropped a little further in December, has undermined the case for any further rate hikes in the near term. But we are more concerned with the policy outlook further ahead. After all, core inflation is likely to stay elevated, but the RBI’s new governor is already laying the groundwork for policy loosening."

According to Shah, focussing on the CPI measure, fuel prices have dropped sharply in rupee terms following the slump in global oil prices and the rally in the rupee against the US dollar since October. As such, the transport component of consumer price inflation is likely to have fallen substantially. (See Chart 3.) Meanwhile, vegetable price inflation appears to have stabilised last month, although an outright pick-up is only likely to materialise in early 2019. 

source: tradingeconomics.com

But, Shah also adds that, core price pressures are likely to have remained high. This is a reflection of recent strong economic momentum, which has caused capacity utilisation rates to rise to their highest level in over seven years. We expect underlying price pressures to remain elevated for a while.

However, coming back to December 2018 numbers, Shah's  forecast is that CPI inflation will have edged down further to 2.1% y/y in December. 

Similarly, Teresa John at Nirmal Bang said, "CPI inflation in December 2018 is likely to come in at 2.13% YoY, down from 2.33% in the previous month. The deflation in food prices is expected to sustain. Food and beverage inflation is expected to decline 1.58% YoY, after a 1.69% fall in the previous month. Prices of fruits and vegetables continued to decline in December 2018, although vegetable prices, particularly tomatoes, witnessed an uptick in January 2019."

John also explains that, cereal and pulses prices also remain muted while sugar prices continued to decline on bumper output. The fuel and light category is also expected to witness a sequential softening on lower LPG prices. Core inflation (excluding food and fuel, but including petrol and diesel) is expected to soften slightly to 5.5% YoY, down from 5.7% in the previous month. Soft petrol and diesel prices will contribute to the decline in core inflation. 

If CPI inflation is seen to come below 2.15% in December month, then this comes as a good news to RBI for further rate cut in policy repo rate which can be a possibility in February 2019. 

This in return comes as an helping hand for common man who opts for loans in regards to home, personal and vehicle. 

When banks borrow funds from the central bank during shortages, they are currently paying a higher interest rate, which is 6.50%. If policy repo rate drops this makes borrowing of funds cheaper for banks, which then leads to better room for lowering lending rates. 

Repo is referred to as repurchase option, which comes as a contract provided by a bank to RBI for availing overnight loans by giving eligible securities like Treasury Bills with a commitment that they will purchase the security back at a predetermined price. Hence, the interest rate charged on this repo transaction is called repo rate.