India Economy WPI - Manufactured-product deflation quickens by Anand Rathi Financial Services

For the seventh consecutive month, the WPI index held in deflation. For a third month, all the components of the WPI were in negative territory. While there was some pull-back from fuel, deflation in primary articles and manufactured products quickened. The WPI is likely to be in deflation at least till Aug15. However, any policy action by the RBI in CY15 is ruled out.

Performance: The WPI continued to be in deflation for the seventh month in a row. In May15, it was -2.4% (-2.7% in Apr15). Primary articles continued in the negative (-0.8%); since May14 the series has been volatile but trending down. With -10.5% in May15 (vs. -13% the month prior), fuel was in deflation for the seventh successive month. Manufactured products was negative for a third month running. From -0.5% in Apr15, it worsened to -0.6% the month following. In line with the trend seen in the CPI figures, food inflation softened to 2.3%. Deflation in both core and non-core fell.

Assessment: Manufactured-product prices reflect the large y-o-y drop in international commodity prices and the loss of pricing power in manufactured products (due to restrained demand). Wood products, paper and non-metallic mineral products are the only exceptions to this trend. As noted in yesterday's CPI inflation data, food continues to soften because of soft global prices. Again, similar to the trends noted in CPI inflation, we see fuel deflation decreasing because of the rise in crude prices.

Outlook: Excess global capacity, a slowdown in the global recovery, lack of domestic demand, and no sharp turnaround in investment capex would keep manufactured goods in deflation. For the next five-six months we see this downtrend. The bottoming out of fuel inflation also looks some time away, but the impact of firming crude price is already visible. While the broad trend in food inflation is downward (excluding a few items), non-food articles are likely to contribute to primary-article inflation. Overall, the headline figure is likely to continue in deflation at least till Aug15.

Recommendations: Since India has experienced a normal monsoon in three of the last five years, consistently high food prices during this period cannot be ascribed to weather-disturbance-driven poor harvests. In fact, despite the 2014 kharif and 2015 rabi crops falling below normal, food inflation has now largely been contained. Manufactured-product deflation suggests feeble demand, which could lead to future rate cuts. However, since the RBI has already front-loaded the rate cut, we feel that it will not further trim rates in CY15. Beyond Jan16, the RBI has the mandate to hold inflation within the 2-6% band. Hence, there is the slight possibility of a 25-bp rate cut in FY16, which could materialise only if some extraordinary factors arise.

Source : Equity Bulls

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