Disinflation reinforced. The rebased January CPI print was at 5.11%. But statistical difficulties in back-casting (owing to absence of previous years’ linking factors) make it challenging to ascertain past data. However, broad read of the data suggests that disinflationary forces have sustained, more importantly in the core. We continue to see RBI being on a policy-easing path, helped by falling inflationary trends.
Softer inflation bias again
The CPI under the new base (2012=100) and revised methodology appeared to have added further downward bias to the year-on-year figures. As per the new index, January 2015 headline CPI inflation came in at 5.11%. Adjusting for the linking factor to make it compatible with old series, the January figure would have looked marginally higher at ~5.15%. However, the linking factor has been computed by the CSO only for the year 2014 and hence it becomes difficult to back-cast the data to earlier years and compute the revised yoy inflation for previous months. Thus, we would have to wait for further months of data to clearly understand the extent of the disinflationary trend.
While computational changes from an arithmetic mean (AM) to a geometric mean (GM) may have added downward bias at the margin, certain components on the core side appear to have shown decent drops. For instance, for housing that now accounts for 10.07% (9.77% previously), the inflation is at 5.11% as against the CY2014 average of 9.0% (under the old series). Core inflation (on GM basis) printed 4.12% while food, clothing and energy came in at 6.1%, 6.2% and 3.7%, respectively.
Key methodological changes to the new CPI series
Key computational changes in the new base 2012 CPI include:
1. Move to geometric mean over arithmetic mean to moderate the volatilities of the indices;
2. Changes in the weighing diagram in line with the consumption pattern as reflected in the Consumer Expenditure Survey (CES), 2011-12;
3. Doubling of the sample size house rent data for House Rent Index to 13,368 dwellings;
4. Increased sample coverage from 437 to 448 in rural and from 450 to 460 in urban region.
RBI likely to remain soft on interest rates
To a certain extent the inflation as also the growth data analysis remains incomplete so far as understanding the long-series trend of both. With inflation appearing to remain with a downward bias, we stick to our call that RBI will continue with its softer stance on interest rates and still call for an additional easing of 50-75 bps in the rest of CY2015. However, we think that the RBI might want to wait it out till April before it implements the next repo rate cut of 25 bps, as it would arm them with another round of rebased inflation data to understand the exact nature of the disinflationary trend.
IIP on old base loses relevance for national accounting purpose
December IIP (2004-05=100) printed at 1.7%, with manufacturing, mining and electricity at 2.1%, (-)3.2% and 4.8%, respectively. For GDP computation purpose, this data is irrelevant as not only the 3QFY15 GDP with a new base is already out, but the yawning gap between the 3Q average IIP manufacturing and GDP manufacturing growth confirms redundancy of this series.