The WPI inflation after depicting an ascending trend in the last few months (since May last year), mellowed down to 6.16% in December 2013; it being the lowest so far for this fiscal year and breached most poll estimates of around 7.00% for the data. However the data for the month of October 2013 underwent an upwards revision of 24 basis points (bps) placing it at 7.24%.
 

WPI Inflation mellowed down!

Data as on December 2013
(Source: Office of the Economic Advisor, PersonalFN Research)  

The decrease in WPI inflation for December 2013 was mainly account of:

Food inflation:
The data here revealed that food articles (which have a weightage of 14.34% in WPI) descended to 13.68% in December 2013 from 19.93% in the previous month. The reduction in inflationary pressures for vegetable attributed to the descending move in food inflation; where onions and tomatoes (which had earlier brought in tears for the common man and got them red in the face) reduced to 39.56% and 159.46% respectively on a year-on-year basis. The overall prices of vegetables in general, reduced to 57.33% in December 2013 from 95.25% registered in the previous month; thereby bring in some relief for the common man. Likewise inflation in fruits also reported a decline having reduced to 9.07% in December 2013 from 13.73% in the previous month.

Inflation in protein based items such as egg, meat and fish also saw a decline with the data thereto for December 2013 coming in at 11.40% vs.15.19% in the previous month.

Non-Food article inflation:
Non-food articles (which have a weightage of 4.26% in WPI) which consist of fibre, oil seeds and minerals, also witnessed reduction in inflation pressures with the data for December 2013 coming in at 6.04% vis-à-vis 7.60% reported in the previous month. Thus once again non-food articles too brought in some comfort for the common man.

Fuel & Power inflation:
Fuel and power inflation (which has weightage of 14.91% in WPI) after showing some steam and inflationary pressures, eased in December 2013, with the data coming in at 10.98% as against 11.08% in the previous month. With Brent crude oil prices having mellowed from their earlier level and relatively stable and better position for the Indian rupee, also attributed to decrease in this component of inflation. But increase in LPG price in December 2013 led to the data for LPG component in fuel and power inflation coming in at 1.54% in December 2013 as against a contraction of -10.90% in the previous month.

Manufacturing products inflation:
The data here did not show any increase or a decrease. It remained absolutely flat, at the same level of 2.64% reported in November 2013. This seemingly was account of the lull witnessed in the industrial activity.

PersonalFN's View on inflation:

While monsoon were normal this year, it did some damage to the vital kharif crops. Nonetheless the steps taken by the Government to address to the supply-chain issues brought in some relief for the common man through reduced prices – especially in case of onions and tomatoes. Also with sowing of rabi crops being encouraging this year, it is expected by the Government that food grain production would be an all-time high this year. Such a scenario in our view would ebb the inflationary pressures in case of food inflation and even some non-food articles. But for fuel and power inflation, the threat remains from increase in prices. The manufacturing inflation, in our view may remain benign with yet docile industrial activity.

So, would RBI cut rates in its 3rd mid-quarter review of monetary policy 2013-14?

PersonalFN is of the view that, with WPI inflation and CPI inflation (at 9.87% in December 2013) having reduced, the Reserve Bank of India (RBI) would keep policy rates unchanged in its 3rd quarter review of monetary policy (scheduled on January 28, 2014). A reduction in policy rates seems unlikely as core inflation yet appears sticky as it has inched-up marginally from 2.6% in November 2013 to 2.7% in December 2013. Already core CPI inflation is hovering at around 8.2%, which according to the RBI Governor, Dr. Raghuram Rajan is uncomfortably high.

Dr Rajan would also be watchful of the impact which the tapering in stimulus by the U.S. Federal Reserve would have on the Indian rupee. This is because if the U.S. dollar strengthens as a reaction to the move of the U.S. Federal Reserve, the risk of imported inflation also persists.

The fiscal deficit situation (which has run-up 93.9% of the budgeted target of Rs 5.42 lakh crore in the first 8 months of the present fiscal year) would also be another factor that would decide the monetary policy action of RBI. Moreover, RBI has clarified previously that no single data point would decide the course of policy action; it has preferred to await some more clarity on various macro-economic indicators.

Impact on equity markets...
The markets have reacted to WPI inflation data quite positively and thus on the data of announcement (i.e. on January 15, 2013) ended with a gain of +256.61 points (at 21,289.49 points) with interest sensitive sectors led by banks taking the lead. The data infused positive sentiments in the market as overall breadth in the market was positive. But what monetary policy actions does the RBI actually takes in its 3rd quarter review of monetary policy 2012-13 would guide the markets better.

Before we go for Lok Sabha polls this year (sometime from mid-April), the announcements in the Budget 2014 (which is going to be an interim one) would set tone for the markets, before the full-fledged budget is presented in the parliament by the next Government at the centre. While the results of the recently concluded polls in 5 states has given a sense to the markets of which political party may come to power at the centre in the ensuing general elections, the political landscape would be interesting to watch over the next three months as most political parties would be drawing their strategies. So far, the rally which occurred in the last quarter of the calendar year gone by was on account of NaMo wave, as BJP under its prime ministerial candidate, Mr Narendra Modi is perceived to be more business friendly and reform oriented than the current Congress-led United Progressive Alliance (UPA), and therefore, better equipped to put the Indian economy back on a high-growth trajectory. But the markets are now treading cautiously and would take cognizance of the sprouting macroeconomic and political scenario.

Impact on debt markets...
The Indian debt markets too were enthused by a reduction in WPI inflation and CPI for December 2013, and thus the 8.83% 2023 (10-Yr) G-Sec yield too mellowed down by about 10 bps from its previous day's close of 8.72% (i.e. on January 13, 2014). Expectations of RBI keeping policy rates unchanged in its ensuing monetary policy review meeting led facilitated yield to drop. But going forward, all would depend on what policy stance the RBI actually adopts. RBI has already clarified previously that no single data point would decide the course of policy action and it would prefer to await some more clarity on various macro-economic indicators. So debt markets would be on tenter hooks given this statement.

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