Dis-inflation to inflation: upswing gathering pace

Inline with our earlier view regarding the evolving inflationary dynamics, the hike in power and energy prices is now mirrored in the sharp increase in the overall price level. This is evident from the jump in SPI inflation from 12.9%YoY in Dec’09 to 18.3%YoY in Jan’10. With the Central Bank Governor Mr. Salim Raza reportedly linking future cuts in the discount rate to “deflation”, the room for monetary easing could narrow in 1HCY10. Already CPI inflation has risen from 8.87%YoY in Oct’09 to 10.52%YoY in Dec’09. In light of the recent sharp upswing in the SPI, we estimate CPI inflation to rise to 13.5%YoY in Jan’10.