India Economy - WPI - Food spearheads the pull back: AnandRathi Financial Services

Mr. Sujan Hajra(Chief Economist- AnandRathi Financial Services) on India Economy - WPI - Food spearheads the pull back

For the 14th month running, in Dec'15 the WPI continued in deflation (-0.7%). The pullback in WPI inflation stemmed primarily from food. The high inflation in pulses and onions, and hardening inflation in other foods, are driving food inflation. Fuel deflation fell to single digits (-9.1%), while manufactured products slowed slightly to -1.4%. While WPI inflation could be positive in the next few months, the lagged impact of crude might push WPI back into deflation. Any rate cut would be decided on 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. WPI inflation in Dec'15 was -0.7% (-2% in Nov'15). The jump in food inflation, at 6.2%, was considerable (3.8% last month). Deflation in fuel & power rose to -9.1% (vs. -11.1%). Manufactured-product deflation was also slightly lower (-1.4%). Non-core inflation (0.8%) turned positive after 13 months. Core deflation slowed to -2% (a 151bp correction). Ytd deflation was -3%, within which, the fuel and power component is in a -12.6% deflation. In the past five months WPI inflation rose 433bps.

Assessment. For the fifth month in a row, WPI deflation has been lower. After having risen for the past three months, the WPI fell in Dec'15. While the food index has gone up, both manufactured product and fuel indices have dropped. Pulses inflation, corrected marginally to 56%, inflation in onion and tomatoes also fell. Potatoes persisted in deflation. The upswing in other vegetables, fruit and spices is causing the hardening. There was broad-based deflation in basic metals, textiles, rubber & plastic products due to falling commodity prices.

Outlook. While prices of food items are likely to continue to firm up, the trend in sensitive items such as pulses, onion and tomatoes are downward. The impact of the fall in crude prices in Nov and Dec'15 has yet to be factored into the fuel deflation. So, while WPI might turn positive in the next couple of months, it is likely to slip into the negative, again. Surplus global capacity and the slowdown in global recovery would prolong the capex cycle; so, the turnaround in manufactured-product inflation would be protracted.

Recommendations. We expect the CPI to hold within the RBI's target of under 6% for Jan'16. The upside risks to this figure are contained—for two reasons. First, falling crude prices; second, low MSP rise for rabi and kharif crops announced for FY16. The MSP announced for the rabi crop ranges between 5% and 8%; for kharif crops it is around 2% to 4%. We expect CPI inflation to peak in Jan'16. If this downshift plays out, scope remains for another 50- to 75-bp rate cut in 2016. The rate-cut is likely to be introduced, post-Budget.

Source : Equity Bulls

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