WPI - Negative WPI to persist through CY15: Anand Rathi Research

In deflation since Nov'14, the WPI Aug'15 reading of -4.95% has been the highest. It was considerably above consensus and our expectation. The surprise stemmed from the quickening pace in manufactured-product deflation and a sharp fall in the fuel index. We expect the WPI to continue in deflation in CY15. And following the good CPI figure for Jul'15, we expect 3.64% CPI inflation in Aug'15, and the RBI to cut the rate by 25bps at its Sep'15 policy meeting.

Performance. The Aug'15 WPI deflation was -4.9% (-4.1% in Jul'15); it has been negative since Nov'14 and has slipped 1,094bps in the past 18 months. This was a broad-based softening, with all the three heads in the negative. Food inflation at -1.5% (vs. -1.4%) was negative for the second consecutive month. Deflation in fuel & power was -16.5% (vs. -12.8%). Manufactured-product deflation was -1.9% (vs. -1.5%). In the past 12 months, inflation has dropped 489bps. Non-core deflation quickened to -6.9% (vs. -5.6%). Core deflation also gathered pace to -3.2%. Ytd deflation was -3.2%, within which the fuel and & power component is in a -12.1% deflation.

Assessment. For a third consecutive month, the index of manufactured products has fallen. This came from deflation in basic metals, chemical products and manufactured food products, 22% of the overall index. The Indian basket of crude-oil prices has slipped in the past three months; it averaged Rs. 44.3 a barrel in Aug'15, mirroring the sharp deflation in fuel during Jun-Aug. Pulses inflation held above 30% for a third straight month. The 65% onion inflation was eclipsed in the -21% vegetable inflation.

Outlook. The trajectory of fuel inflation would depend on crude-oil prices. But the favourable base is likely to keep fuel in deflation in the medium term. The surplus global capacity, slowdown in global recovery, lack of domestic demand and no sharp turnaround in investment capex place a turnaround in manufactured goods a few months away. 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 in CY15.

Recommendations. The favourable base drove CPI inflation below 4% in Jul'14 and we expect the Aug'15 figure, to be released later today, to come in at 3.64%. Subsequently, we expect inflation to pick up. But, by opting for low MSPs, the government has successfully broken the vicious link between NREGA-induced rural wages, the cost of cultivation and MSPs. Hence, food inflation is unlikely to be a worry in the near term. Following the good inflation figure, and the mounting clamor for an interest-rate cut in the monetary-policy meeting to be held later this month, we expect the RBI to cut the rate by 25bps.

Source : Equity Bulls

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