Energy prices are falling in the international market. Crude oil has lost nearly 25% since June 2014 and recently reached a 4-year low. You see, India gets dual benefit when global crude oil prices falls. One, it results in a lower oil import bill, and two reduces inflationary pressures (as fuel gets cheaper).

You may be pleasantly surprised to know that, India has got some respite from rising inflation witnessed for quite a while. Inflation measured by the movement of Wholesale Price Index (WPI) and the Consumer Price Index (CPI) fell to 2.38% and 6.46% respectively in September 2014. With this retail inflation (measured by CPI) reached its lowest ever and wholesale inflation (measured by WPI) too recorded a 5-year low. For the same month a year before, CPI had come in at 9.84% while WPI stood at 7.05%.
 

Falling Inflation...

(Source: MOSPI, Office of Economic Advisor, PersonalFN Research)
Now while falling inflation is desirable, the gap between WPI and CPI reading suggests that food price inflation still remains a worry. WPI largely represents the industrial inflation as manufacturing inflation accounts for nearly 2/3rd of the index. On the Other hand, CPI largely captures the food price inflation better.
  Hard facts...

Category	Weight in WPI	Weight in CPI	WPI	CPI
Food articles	14.34	47.58	3.52%	7.56%
Vegetables	1.74	5.44	-4.88%	8.59%
Fruits	2.11	1.89	20.95%	22.40%
Fuel and Power	14.91	9.49	1.33%	3.45%
Egg, fish and meat	2.41	2.89	-4.12%	6.35%
Cereals	3.37	14.59	3.45%	6.42%

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

Table above suggests that stickiness is yet seen in food articles such as cereals, vegetables and fruits at the retail level. It is noteworthy that, although vegetable prices are actually falling at the wholesale markets, their prices for retail consumers are still high. The same is true for protein rich items such as eggs, fish and meat.

Would inflation continue to go down?
Where inflation heads would predominately depend on energy prices and the farm output. Despite delayed start and severe deficiency reported by the southwest monsoon in the first two months of the season, rainfall deficiency sharply dropped towards the end of season. India received 12% lower rainfall on an average in 2014. But this is unlikely to affect the food grain production to a much extent that may cause high inflationary pressures. Late rains might improve soil moisture and help in raising farm produce in rabi season.

As far as crude oil prices are concerned, they might continue to remain soft as Saudi Arabia has not signaled any cut in oil production despite of falling crude oil prices. The geo-political tensions have eased as well, but the situation needs to be monitored closely. At present ample supply of oil and withdrawal of monetary stimulus in the U.S. may result in oil prices remaining benign. Furthermore, India appears to be in a better position to protect its currency if the U.S. Federal Reserve hikes interest rates next year.

How markets reacted?
Despite of falling inflation, markets remained quiet. This suggests that, either markets are unsure about the future direction of inflation or they might be inferring that, inflation may not translate in any immediate rate cut. Bond prices though have reacted positively to falling inflation.

What investors should do?
PersonalFN is of the view that, CPI inflation has fallen well below the target level of RBI and therefore a rate cut might be expected. Having said this, PersonalFN believes, the RBI may not lower rates right away. In fact, it might wait for inflation to settle at lower trajectory. It may also closely monitor the performance of the Government on the fiscal deficit front.

PersonalFN is of the view that, investors shouldn’t speculate on the monetary policy stance of RBI. Debt investors should consider their time horizon before selecting a debt fund category. 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.
 

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