India Economy - WPI follows CPI to record low - Anand Rathi

WPI inflation fell to 2.4% in Sep'14, the lowest since Oct'09. Food (3.4%) and fuel (1.3%) inflation declined sharply, and manufactured product inflation slid below 3%. With the Sep'14 CPI inflation falling sharply and a high possibility of it softening further in the next couple of months, RBI would be under pressure to cut the policy rates to revive growth and investment. The rate softening cycle can start with a 25-bps cut in end 2014.

Performance. WPI inflation slowed to 2.4% in Sep'14, the lowest in five years and 136bps lower than last month. Food inflation fell to 3.4%, the lowest since Jan'12. Inflation for cereals softened sharply, while vegetables and protein & meat items continued to be in deflation. While electricity inflation fell to 3.6%, deflation in petrol was -9.4%. Manufactured products inflation also slowed to 2.8%. Core touched a new low of 2.2%; the gap between core and non-core also narrowed this month. Inflation for Jul'14 has been revised up to 5.4% from 5.2%.

Assessment. Today's WPI release mirrored yesterday's CPI data release, showing similar trends of softening in food and fuel inflation (leading the pack). Despite the deflation in vegetables (led by onion), 90% inflation was noted in potatoes. There has been a broad-based softening in fuel and power, with coal in deflation for the third consecutive month and electricity inflation below 5%. Barring beverages, inflation for most other components among manufactured products softened.

Outlook. Falling food inflation is playing a large role in the softening of the ongoing headline inflation, and this trend could continue. Fuel & power inflation is likely to slide further as pass-through of softer global oil prices play out. With faster-than expected cooling off, possibility of the WPI inflation briefly entering deflation zone cannot be ruled out.

Recommendations. The latest IIP data release shows that after a good first quarter, growth has slowed this quarter. Export growth has also decelerated. The RBI has not, so far, reacted to the simultaneous slowing down of inflation and growth. Yet, with both WPI and CPI softening more than expected and IIP growth lower than the consensus expectation, the demand for a change in RBI's stance is increasing. The primary objective of public policies at this juncture is likely to veer towards reviving growth rather than further lowering inflation. We were one of the few on the Street who expected a rate cut in Dec'14, given our anticipated slowdown in inflation. With the inflation data releases, along with the IIP, the probability of a rate-cut in Dec'14 has now increased. Any chance of the RBI relenting by end-2014, however, would only be possible if inflation continues to soften in the next few months ahead of consensus expectations, which we feel, is a distant possibility.

Source : Equity Bulls

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