"Inflation Report"
Moving further downhill, as expected
Wholesale price index (WPI)-based inflation for the week-ended January 24 came in at 5.07% Y-o-Y, broadly in line with expectations (Edelweiss and consensus at 5.25%). WPI inflation had been rising in the past two weeks due to a spurt in prices of primary articles and prices of certain manufacturing prices, largely reflecting the truckers strike during January 5-12. The overall trend for prices in general, however, continues to remain downward with falling prices and weakening demand. Also, a markedly favourable base has helped to soften inflation significantly in the current week.
On a W-o-W basis, while food prices (including manufactured food products) were still on the rise, softening in prices came from significant decline in prices of metal and textile products. Fuel group inflation also rose on account of higher prices of naptha, furnace oil and light diesel oil.
Petro price cut impact to show up next week
The government, on January 28, 2009, cut domestic petrol and diesel prices by INR 5 and INR 2 per litre, respectively, with effect from January 29, 2009. It also cut prices of LPG by INR 25 per cylinder. The effect of these price cuts will reflect in inflation data releasing on February 12, which is likely to directly impact inflation by ~60bps.
Headline inflation fell by more than half from its intra-year peak of 12.91% on August 2, 2008, to near the central bank's long-stated comfort zone of 5% this week. This reflected a rapid correction in commodity prices, which has toned down inflation expectations significantly. The base effects will also continue to remain favourable in the coming months. Even if overall prices stay constant at the current levels, Y-o-Y inflation could drop below 2% by March 2009.
The fast correction in commodity prices reiterates our view of a spell of negative Y-o-Y inflation in CY09. We, however, prefer to refrain from calling it deflation as over a two-year period from 2007, overall prices will still show an annualised price rise of ~4-5%.
RBI restrained in policy meeting; likely to act soon
In the third quarter review of monetary policy on January 27, RBI kept all key policy rates unchanged. The status quo in the current policy is in line with our expectations as the entire impact of the cut in policy rates has not yet been completely passed on by banks to their borrowers. However, we believe another 50bps cut in both repo and reverse repo rates is on the cards before the April round of monetary policy. The expectation of one more round of rate cut is supported by the central bank's expectations of further softening of growth and stated policy objective of supporting the same.
Recent media reports suggest that in January, India's exports have also struck a dismal performance with 22% Y-o-Y decline. Data for industrial production (IIP) for December is scheduled to be released next week. IIP for December is set to stay muted; a possible negative Y-o-Y growth of IIP in December may put additional pressure on the central bank to adopt further monetary easing.
Edelweiss Asset Management Limited.
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