After touching a high of 5.21% in December 2017, CPI inflation has been on a downtrend for the last 3 months in succession. For the month of March-18, CPI inflation came in lower at 4.28%. This is well within the RBI target of 4-5% inflation for the full year. What does the break-down of inflation tell us and what does it augur for repo rates?

A clear fall in food inflation

The fall in CPI inflation in March was largely driven by a 55 basis points fall in food inflation on a MOM basis. While vegetable inflation has subsided to a large extent, pulses inflation also stays in negative territory. The real downward thrust came from cereals and sugar. Cereals inflation was subdued at just above 2% while sugar inflation slipped into negative territory. This was largely caused by a glut in sugar supply. However, the trajectory of food inflation will largely depend on the monsoons and the actual Kharif output in 2018.

Core inflation and Crude oil

Core inflation, excluding food and crude oil, has been on an uptrend. That is indicative of rising inflation expectations. Also, the crude oil prices are likely to gravitate towards the $80/bbl mark and that is likely to have an impact on secondary inflation. Crude has strong externalities and it is likely to impact a lot of core and non-core items of inflation substantially.

Will RBI look to cut rates?

The big question is whether the RBI will look to cut rates? Most likely not! Firstly, the RBI will want to see the monsoon data, the Kharif output and efficacy of the new MSP formula. RBI may be unwilling to cut rates unless there is greater clarity on the crude trajectory. But above all, the RBI may want to gauge the hawkishness of the US Fed. If the Fed gets too hawkish, the RBI may not want to risk FPI outflows!