The WPI inflation seems to have mellowed down yet again after depicting an ascending trend in since May last year. The data for January 2014 came in at 5.05%, falling further from the earlier month and placing it at an 8-month low.
 

WPI Inflation mellowed down!

Data as on January 2014
(Source: Office of the Economic Advisor, PersonalFN Research)  

The decrease in WPI inflation for January 2014 was mainly account of:

Food inflation:
The data here revealed that food articles (which have a weightage of 14.34% in WPI) descended sharply to 8.80% in January 2014 from 13.68% in the previous month and strikingly high double-digit data seen in the previous six months. The reduction in inflationary pressures in vegetables attributed to the descending move in food inflation, where prices of onions and tomatoes reduced to 6.59% (from 39.56% in December) and 25.75% (from 159.46% in December) respectively. The overall prices of vegetables in general, reduced sharply to 16.60% in January 2014 from 57.33% in December 2013 and absurdly high data points seen for the previous few months.

Likewise inflation in fruits also reported a decline having reduced to 5.32% from 9.07% reported in December 2013 and double-digit data witnessed for few months before.

Inflation in protein based items such as egg, meat and fish also witnessed certain decline with the data thereto coming in at 10.94% vs. 11.40% in the previous month and even higher double-digit data in the months before.

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 January 2014 coming in at 4.40% vis-à-vis 6.04% 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) too declined to 10.03% from 10.98% in December 2013. With Brent crude oil prices remaining docile and Indian rupee remaining relatively stable, also attributed to decrease in this component of inflation.

However, manufactured products depicted a slight uptick with the data for January 2014 being reported at 2.76% vis-à-vis 2.64% in the month prior, despite 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. Likewise with prices of Piped Natural Gas (PNG) and Compressed Natural Gas (CNG) having reduced, the threat from fuel and power inflation seems to have disappeared. While manufacturing inflation has reported in January 2014, with lull in industrial activity persisting it would remain benign.

So, would RBI cut rates in the next monetary policy review?

PersonalFN is of the view that, with WPI inflation and CPI inflation (at 8.79% in January 2014) having reduced, the Reserve Bank of India (RBI) would keep policy rates unchanged in the next monetary policy review (scheduled on April 1, 2014). The decline in inflation seems to be in line with the expectations of the central bank, but the core WPI inflation at 3.00% would resist RBI from reducing policy rates. Moreover, the central bank would also take cognisance of the other economic indicators.

The fiscal deficit has run-up further to 95.2% of the budgeted target of Rs 5.42 lakh crore in the first 9 months, from 93.9% at the end of November 2013. While the finance minister, Mr P. Chidambaram has said that the fiscal target will not be breached and drawn a red line thereto (by tightening the spending as revenues as slowed due sluggish recovery), in our opinion would breach the target of 4.8%. The Government has already doling out populist measures ahead of the general elections in their endeavour to swing vote banks in their favour. Take for instance, an increase in subsidised LPG cylinders from 9 to 12, followed by a reduction in prices of Piped Natural Gas (PNG) and Compressed Natural Gas (CNG); it all seems to be a pre-poll strategy. You see, the fiscal deficit remains a concern has implications on the country’s sovereign ratings. Standard & Poor's has already said chances of a credit ratings downgrade for India was higher than for Indonesia. Moreover, the S&P has indicated that the negative outlook maintained on India may be lowered if the Government that takes office after the general election does not appear capable of reversing India’s low economic growth and put the house in order. The RBI too has noted in its recent Financial Stability Report that the relatively high fiscal deficit was a major concern. So, it wouldn’t be easy for the finance minister to walk-the-talk in view of poor revenue realisation and tardy progress of the disinvestment programme.

Impact on equity markets...
The markets have reacted to WPI inflation data quite positively and thus on the data of announcement (i.e. on February 14, 2014) ended with a gain of +173.47 points (at 20,336.82 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 WPI inflation was not the only data point for the rise in the markets, as Q3FY14, 2G spectrum allocation and company specific fundamental also had their role to play.

Going forward it is likely that the market would move sideways as investors would tread cautiously as political landscape takes shape ahead of 2014 general elections. The interim budget is likely to be a non-event for the market, as what the finance minister would do, is cut plan / non-plan expenditure in the endeavour to achieve the fiscal deficit target.

Impact on debt markets...
The Indian debt markets however, weren’t enthused by the WPI inflation data for January 2014, as they read the core WPI inflation data, which came in at 3.00%. Thus as an impact, benchmark 10-year bond yield rose 2 basis points to 8.83% after the WPI data. The yield had initially fallen to as low as 8.79%. Moreover, the core WPI inflation data also led the Indian debt market to believe that RBI would thus keep policy rates unchanged.

Going forward, the fiscal deficit numbers, which would be announced in the coming interim budget, would provide guidance to debt markets.

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