Continuing its downward journey, inflation made another low in November 2014. Both, the Wholesale Price Index (WPI) and Consumer Price Index (CPI) inflation moderated substantially, wherein at the wholesale level it recorded a 5 ½ year low, while at the retail level (measured by CPI inflation) an all-time low (since the new data series was launched in January 2011).

WPI inflation has fallen to 0.00% in November 2014 vs. 1.77% in the month before and from 7.52% registered in November 2013. You see, inflation in manufacturing products under WPI softened to 2.04% in November 2014 vs. 2.43% in the month before. Likewise, fuel and power inflation under WPI came in at -4.91%, contributing to zero level WPI inflation and so was the fall in prices of vegetables and fruits.

Retail inflation reduced further to 4.38% in November 2014 from 5.52% recorded in the month before and 11.16% in November 2013. Decline in food inflation led by sharp fall in vegetable prices has lowered the overall inflationary pressure. Similarly, softening in fuel prices also contributed to the fall.
 

Inflation mellows down further...

(Source: MOSPI, Office of Economic Advisor, PersonalFN Research)
The chart above suggests that inflation pressure appears to be waning since June 2014. Thus the RBI too in its monetary policy stance and rationale to 5th bi-monthly monetary policy has cited that consistent with the risk set out in the 4th bi-monthly monetary policy, headline inflation has been receding steadily and current readings are well below the January 2015 target of 8.00% as well as January 2016 target of 6.00%.
  Hard facts…

Category	Weight in WPI	Weight in CPI	WPI	CPI
Food articles	14.34	47.58	0.63%	3.50%
Vegetables	1.74	5.44	-28.57%	-10.90%
Fruits	2.11	1.89	14.78%	13.74%
Fuel and Power	14.91	9.49	-4.91%	3.27%
Egg, fish and meat	2.41	2.89	4.36%	6.48%

(Source: MOSPI, Office of Economic Advisor, PersonalFN Research)  

You see, fuel and power has more weightage in WPI than on CPI. A persistent fall in international crude oil prices witnessed over the last few months has been a saviour for India. Falling fuel prices help lower inflation at broader level as it directly lowers energy costs for businesses and transport fuel becomes cheaper.

As far as inflation in food articles is concerned, a descending trend seen herein, especially in prices of vegetables, cereals and fruits is one of the main reasons behind the fall in retail inflation. But it is noteworthy that protein rich food items yet seem to be keeping pressure on WPI and CPI inflation with prices remaining elevated. Nevertheless, the difference between inflation rates for some select categories at wholesale level and at the retail level has decreased considerably in November suggesting that some benefits of lower prices have benefited consumers.

Would inflation continue to go down?
At present the favourable base effect is panning out well on the inflation data. But once this statistical effect wanes, inflation data would put its ugly head up. The central bank to is wary about the possibility of favourable base effect dissipating and thus is of the view that inflation data for December 2014 (which will be released in mid-January 2014) may rise well above current levels. Hence, although RBI has acknowledged easing price pressures, it has revised the inflation forecast for March 2015 to 6.00%. Also, once international crude oil price reverse their current descending trend, the effect of the same would be seen on inflation. Also the outlook for inflation over the medium term would be contingent upon expectations of a normal south-west monsoon in 2015.

How markets reacted?
Markets have hit a slippery path for over a week now. Sliding crude oil prices are causing fears of recession in many parts of the world in the backdrop of weak demand. The U.S. dollar has strengthened resulting in steep fall in some emerging market currencies. You see, the Indian rupee which held strong so far, has begun to give up some ground. It touched a 13-month low recently when it breached the 63-mark against the greenback. So, while at the fifth bi-monthly monetary policy RBI had given enough hints of cutting policy rates early next year, falling rupee may delay the much awaited fall in policy rates.

The trade deficit of India has also widened to 18-month high with the data for November 2014 coming in at U.S. $16.86 billion. Exports seem to gather pace by recording a rise of 7.27% (on year-on-year basis) in November 2014. But higher imports are a spoiler for India’s trade balance position. You see, gold imports shot up by over 500% this November to U.S. $5.61 billion from U.S. $835.83 million in November last year. The gold imports rose over 34% from those recorded in October 2014. Such massive rise coupled by strong rise in imports of machinery and transport equipment resulted in higher imports. Fertilisers, electronics and coal were among the other items imported heavily. While the strong rise in gold imports may be a cause of worry for India, jump in machinery and transport equipment raises hopes of a economic recovery.

What investors should do?
Equity investors shouldn’t invest in rate sensitive sectors, expecting a rate cut. Those who don’t have time or expertise to invest directly in equity shares of companies should invest in opportunities funds in a staggered manner to take advantage of investment opportunities. You would be better of avoiding sector and thematic funds. On the other hand, those interested in investing in debt funds shouldn’t speculate on RBI policy action. Although RBI has hinted at rate cuts, it has attached certain conditions to it and the current weakness in the Indian rupee poses a challenge in reducing policy rates. Therefore, investors shouldn’t be under the impression that policy rates would be cut early next year. Investors would be better-off if they consider their time horizon before investing any debt fund. Moreover, please note that debt funds are not risk-free. PersonalFN suggests that you shouldn’t invest more than 20-25% of your debt portfolio in long-term debt funds.

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