The deflationary print of inflation in January Wholesale Price Index (WPI) report was largely a reflection of benign global commodity prices. However, the sequential momentum of both headline and core WPI continues to move south—also reflecting weak pricing power of manufacturers. The secular fall in WPI inflation is encouraging and with a lag should impact the CPI trajectory too. (Read Full Report)
1. Inflation cheers continue
January headline WPI inflation surprised on the downside, contracting 0.39% from (+)0.11% prior—the lowest to print since August 2009. The underlying sequential momentum also remained soft, tracking ~(-)6.7% qoq, saar.
The deceleration in the headline number was largely led by the deflation seen in non-food primary, minerals and energy components—all of which are directly linked to the global commodity cycle. Specifically, non-food primary goods contracted for the fourth consecutive month by 4.07% yoy, largely reflecting sharp correction seen in global fiber and oilseeds prices.
Meanwhile, minerals deflated by 13.75% after (-)8.15% previously. Both of these sub-components contributed (-)0.6 ppt to headline print. Primary food inflation, on the other hand, picked up to 8% from 5.20% previously, with pulses providing the upside on a sequential basis.
2. Energy inflation falls in line with softer global crude prices
The decline in domestic fuel products broadly reflects the decline seen in global crude oil prices, helping yoy energy inflation contract by 10.69%—a significant correction from the ~7% average inflation seen in 1HFY15.
The sub-group contributed (-)1.89 ppt to headline print. With global crude prices trending up from the low levels seen in January and INR’s mild depreciation bias recently, the downward bias from the energy side onto the headline numbers are unlikely to be as strong in February.
3. Core inflation softens further
Core manufactured inflation also continued with its secular decline, printing 0.9% in January after 1.6% in December, partly reflecting soft global commodity prices.
More encouragingly, the underlying momentum has remained benign, and is currently tracking at ~(-)2.2% qoq, saar (Exhibit 1). Among the key components, ‘chemicals and chemical products’ (crude derivative) eased 0.7% while ‘basic metals and alloys’ contracted further by 0.9%.
Our core WPI inflation trajectory hints at further correction in the coming months with expectations of relatively soft commodity prices amid only a mild INR depreciation.
4. Penciling in 50-75 bps rate cut in FY2016
Consistent decline in the inflation matrices hints that disinflationary trends are likely to sustain. Corrections in WPI (directly a resultant of global commodity cycle) should be passed onto the retail inflation side with a lag, hinting at a continuing soft bias for headline CPI.
The recent revisions in CPI (and GDP), as per the new methodologies, have added some confusion around their trend inferences. However, even as forecasting headline CPI with no back-casted history becomes difficult, there seems almost a 30-40 bps downward bias to the new CPI on an average basis over the old CPI.
Thus, we continue to expect the RBI being on a monetary accommodation path, easing by an additional 50-75 bps in FY2016.
By: Indranil Pan, Chief Economist, Kotak Mahindra Bank