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CPI slows: Should we rejoice?
Fri, 14 Mar Pre-Open

Balancing growth and inflation has been quite a task for India's central bank. Since quite some time now, the Indian economy has been struggling on both the aspects. Not only has the economic growth data been disappointing, but high inflation also continues to break the back of the common man. If the monetary policy reviews are anything to go by, it seems that the RBI is more focused on curbing inflation.

However, as per the consumer price inflation (CPI) data released yesterday (8.1%), inflation for the month of February 2014 has come down significantly and is now at its 25 month low. The ease in the inflation has mainly been on account of softening of food prices that has around 45% weight in the CPI. It is quite unfortunate that in an economy like India which boasts of being one of the top food producers in the world, food prices are the major cause of inflation.

The current CPI is quite close to RBI's target inflation rate of 8% for January 2015. While the ease in inflation is good news, does it indicate an improvement in the macro economic scenario? Will this decline allow RBI to cut the policy rates next month? We don't think so. Going forward, food prices will mainly depend on the weather, which is beyond anybody's control. What makes the situation worse are the flawed government policies, highly inefficient public distribution system and supply side issues such as poor storage infrastructure, inefficient logistics, hoarding etc. In short, while the inflation has eased, inflation risks still remain high.

The data on inflation was accompanied by factory output data for the month of January 2014. The same has shown a growth of mere 0.1%. While overall the data may seem to be improving, a contraction in capital goods and consumer goods segment suggests poor investment demand and consumption scenario. In short, despite the statistics, the Indian economy is not out of the woods. Unless the Government undertakes strong policy measures and reforms, it is unlikely that Indian economy will manage to come out of a low growth phase.

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