Exports remain under pressure; WPI deflation deepens - DBS Research Report

Data for July yet far signals significant relief on the inflation front but a still weak external sector which might weigh on production trends. After a surprisingly weak CPI, Jul WPI inflation extended its decline for a ninth consecutive month at -4.1% YoY from Jun's -2.4%. Deflationary forces were evident across the board, but starkest in the fuel/light and minerals category. Fuel (& light) prices fell 12.8% YoY while minerals contracted 26%, both in red for the last nine months. A fall in the food prices was a first since Jan12, dragged by easing vegetable and protein prices while pulses stayed firm. Deflation in manufacturing products intensified to 1.5% from -0.6% in the Jun quarter. Core WPI measure held in small red.

Bulk of the weakness in the WPI inflation has been on account of higher weightage of tradables in its basket and sharp fall in commodity prices. Lower WPI inflation suggests pipeline pressure continue to wane, validating broader expectations that the retail inflation measure will also remain in control in the coming months (subject to monsoon strength). As it stands, waning base effects could see headline WPI return to black Oct-Nov onwards but still-average a tepid 0.2% for the year.

The RBI continues to watch CPI trends closely, with odds of a rate cut in Sep on the rise after a weak Jul CPI.

But the RBI will be mindful of two other factors:

a) fallout of China's move to devalue the yuan;
b) clarity on the US Fed rate direction.

Separately, Jul trade deficit jumped to a seven month high of USD 12.8bn from USD 10.8bn month before. Weak exports continue to offset relief from a lower commodity imports bill. Exports fell -10.3% YoY easing slightly from Jun quarter's 17%. Jul imports also fell 10.3% as oil purchases declined 35% extending its downtrend for a tenth consecutive month. Non-oil imports were up 4% from Jun quarter's 2.6%.

As highlighted in the Asia section of Daily dated 12/Aug, part of the recent weakness in Asian exports is distorted by the dollar-effect i.e revaluation effects. If one denominates Asia's exports in average 'tri-currency' terms, weakness in regional exports (including India) will not be as stark. Additionally, for India the fall in fuel and food commodity prices have hurt petroleum and agri exports, thus moderating the net benefit to the trade balance. External demand outlook also remain uncertain as despite US maintaining a relatively brisk 2-2.5% growth pace, Eurozone and Japan are running closer to 1% and China faces slowdown fears. Together with real rupee strength, the net impact will see this year's current account widen to -1.6% of GDP this year from -1.3% in FY14/15. Service trade surpluses have also lost steam with 12.5% QoQ fall in the Jun15 quarter.

Source : Equity Bulls

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