India Economy - WPI - Vegetable prices bring relief: AnandRathi Financial Services

Mr. Sujan Hajra(Chief Economist - AnandRathi Financial Services) on India Economy - WPI - Vegetable prices bring relief

The WPI index indicated persistent deflation for the 15th consecutive month. Deflation hardened in Jan'16 to -0.9%, led by the fall in fuel and food prices. Cereals and vegetables played a crucial role in deflation continuing. Manufactured product deflation fell for the fifth straight month. Higher manufactured-product prices are likely to be counter-balanced by falling crude prices and to keep WPI in negative for the next four-five months. Any policy action by the RBI depends on the fiscal figures of the FY17 Union Budget and the CPI inflation trajectory.

Performance. WPI continued in deflation for the 15th consecutive month. The Jan'16 WPI figure was -0.9% (vs. -0.7% Dec'15). Food inflation dropped to 5% (from 6.2% the previous month). Deflation in fuel & power rose to -9.2% (vs. -9.1%). Manufactured-product deflation was at a seven-month high of -1.2% (a slight increase from the previous -1.4%). The core deflation fell for the fifth consecutive month. It halved from the Aug'15 figure to -1.7%. A 70bps fall in non-core inflation (0.1%), which had turned positive only in Dec'15 after 13 months, was seen. Ytd deflation was -2.8%, within which, the fuel and power component is in a -12.3% deflation.

Assessment. While food caused much of the rise in the CPI inflation figure released last week, it also caused WPI deflation to strengthen. In Jan'16, vegetables inflation dropped from 21% to 13%. Also, cereal inflation, which has a similar weighting as vegetables, softened. Falling crude prices increased fuel and power deflation. Ytd deflation of -6.6% and -1.6% in basic goods and chemicals, respectively, have kept manufactured products in deflation for a protracted period. Wood and non-metallic mineral products are a few components to command pricing power.

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 fully into the fuel deflation. Surplus global capacity and the slowdown in global recovery would prolong the capex cycle; so, the turnaround in manufactured-product inflation would be delayed. Hence, we expect the WPI to continue in the negative for another four-five months. Thereafter, the low base would help turn WPI inflation positive.

Recommendations. We expect the trends in CPI and WPI inflation are likely to converge into softening territory in the next few months. Low crude prices are likely to drag down fuel deflation, absence of winter rains, over-supply of critical food items such as onions and tomatoes would keep food inflation low. With low MSP growth, CPI inflation is likely to be around 5% in 2016. Any rate action by the RBI would depend on the trajectory of CPI inflation and the fiscal figures of the FY16 Union Budget. We expect a rate cut of 25bps in the April monetary-policy meet.

Source : Equity Bulls

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