India Economy - WPI - Has bottomed out: AnandRathi Financial Services

Mr. Sujan Hajra(Chief Economist- AnandRathi Financial Services) on India Economy - WPI - Has bottomed out:

The Oct'15 WPI inflation was -3.8%, an increase from -4.5% the month prior, in line with us and the consensus. Food and fuel were the chief factors for the pull-back, while the contribution of manufactured-product was small. The index tends to fall in H2, which might result in continuing WPI deflation for the rest of FY16. Any rate cut would driven by the trajectory of CPI inflation; if the CPI is in sync with the RBI's inflation target, another 50- to 75-bp rate-cut in 2016 is likely.

Performance. The Oct'15 WPI deflation was -3.8% (-4.5% in Sep'15). Deflation in manufactured-product was lower (-1.7%). The jump in food inflation was significant, at 1.7% (0.2% last month). Deflation in fuel & power was also lower at -16.3% (from an all-time low of -17.7%). Core, which has been in deflation for the last ten months, was unchanged at -2.9%, while non-core deflation, was lower at -4.9% (-6.3% the month prior). Ytd deflation was -3.5%, within which, the fuel and power component is in a -13.3% deflation. In the past 24 months the WPI has slipped 1,133bps.

Assessment. For a third month in a row WPI deflation has now been lower. In the data released today, we see a broad-based pullback among the components. The broad index has risen for a third consecutive month. Pulses inflation is above 40% and, for the past one y ear, has been galloping. Also, onion inflation, in the past three months, has risen at an average 90%. On the other hand the contribution of food inflation to the rise has been higher than that in fuel and manufactured products. Deflation in basic metals, textiles, rubber & plastic products was steep. The Indian basket of crude-oil prices has been low, mirroring the double-digit deflation in fuel and power.

Outlook. The trajectory of fuel inflation would depend on crude-oil prices. The continuous decline in crude would keep fuel in deflation in the medium term. Food inflation is likely to move up as the impact of favourable base is now exhausted. Initial estimates of the kharif and rabi crops, h owever, show that production has increased from the past year, despite the monsoon deficiency and gives a sense of comfort. The surplus global capacity and the slowdown in global recovery would prolong the capex cycle, so a turnaround in manufactured-product inflation looks distant. The WPI inflation is likely to be in the negative for most of H2 FY16.

Recommendations. The RBI expects inflation in Jan'16 to come at 5.8%; inflation below this would provide it room for further cut rates. Also, we see inflation hardening from now and likely to peak in Jan'16. Our estimate is 5.7% through Dec'15-Jan'16. Since MSP growth has been low, inflation is likely to be around 5% for the next two years. If this downshift plays out, scope exists for another 50- to 75-bp rate-cut in 2016.

Source : Equity Bulls

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