WPI inflation at 4.7%; still rate cut unlikely - Anand Rathi

WPI inflation in Feb'14, at 4.7%, is the lowest since May'13. Both primary and fuel inflation declined, whereas manufactured product inflation remained unchanged. While the trajectories of inflation and growth rule out rate hikes, a cut is likely to wait until 2HCY14.

Performance. In line with our expectations, the overall WPI inflation in Feb'14 slowed down to 4.7% (from 5.0% the previous month). Prices for primary products corrected further to 6.3% (vs. 6.8% in Jan'14); fuel & power fell substantially to 8.7% (vs. 10% in Jan'14), whereas manufactured products inflation remained unchanged at 2.8%. The reduction in prices was once again led by falling food prices, which declined to 8.1% in Feb'14 from 8.8% in the previous month. Core (non-food, non-fuel) inflation inched up to 3.0% in Feb'14, from 2.9% in Jan'14, while non-core inflation fell to 6.8% from 7.7% during the same time. Inflation for Dec'13 has been revised to 6.4% from 6.1%.

Assessment. Despite the headline number being in line with our expectations, the drop in power & fuel inflation surprised us. Manufactured-product inflation remained unchanged at 2.8%. The overall inflationary situation reflects cyclical correction of food prices. Despite facing considerable cost pressures—on account of rising wages, domestic primary raw-material prices and the rupee depreciation—the manufacturing sector has not been able to pass on these cost pressures substantially. The large divergences of levels as well as the opposite directions of change in core WPI and core CPI are in line with our expectations.

Outlook. Although primary food inflation is likely to turn negative by Aug'14, the pace of softening is expected to be arrested in the next three months. Fuel and power inflation fell this month. However, at 23.7%, considerable scope exists for electricity inflation to slide significantly in the near future, especially with the announced cut in electricity prices by several states. The risk of a delayed limited spillover of the past high non-core into core inflation continues. Given the base level, WPI inflation could hover largely at 5-6% in next four months.

Recommendations. The expected large fall in both WPI and CPI has materialized. Moreover, while core CPI inflation in Feb'14 declined below 8%, core WPI remains benign, reflecting no generalised demand pressure. This is corroborated by lackluster industrial growth. While these rule out any possibility of rate hike, we do not expect any rate cut either in the next three months for several reasons: (1) After raising rate in Jan'14, the RBI is unlikely to go for a quick rate cut; (2) CPI – both headline and core - is around 8% and the RBI would like to see it falling further; (3) weather disturbances in the recent past raise possibilities in relapse of rise in fruits and vegetable prices.

Source : Equity Bulls

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