WPI deflation to ease : DBS Research Report

After firm CPI inflation out last week, today's Oct WPI inflation will be watched closely. Fading base effects and a sharp jump in some food categories are likely to push headline up -3.5% YoY from -4.5% in Sep. Food inflation had begun to inch up in Sep and are likely to gather momentum in Oct, lifted by a marked increase in pulses and vegetable prices. Below-normal rains, hoarding/ other malpractices and shifts in sowing patterns have pushed up pulses/ lentils costs sharply in the past quarter, necessitating a step-up in imports and adminis­trative measures to quell prices.

A further pullback in global commodity prices will meanwhile see the fuel and min­eral indices extend their double-digits de­cline. In addition, fad­ing base effects should allow manufacturing product deflation to ease slightly, along with a bounce in core inflationary pressures. In the coming months, we expect easing base effects to lift WPI headline readings into black in early-2016, but remain tepid. As highlighted before, deflation worries, in its strictest sense, are not a material risk for India (IN: RBI - another window opens; 22Sep15).

Problematic defla­tion follows from weak demand. Recent high frequency data indicators do not suggest that India is in midst of such an environment. Underlying growth mo­mentum is slow but turning up. Industrial production growth has stabilized at around 4% pace, credit growth is steadying at lows, rural wages have bottomed and funding costs are set to ease. All these factors should boost investment, while consumption and confidence indices are on the mend. Adjustments to salaries/ pensions for armed personnel and seventh pay commission next year should also lift demand.

Implications for policy are dictated more by the CPI inflation movements than the wholesale counterpart. The spurt in Oct food inflation has stoked concerns over a rise in generalised price pressures and inflationary expectations. After the bunched-up 50bps cut in Sep and ahead of the widely-anticipated lift-off in the US rates by end-year, we expect the Reserve Bank of India (RBI) to pause in December.

Source : Equity Bulls

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