Inflation - way to ground zero

"Inflation Report"

 

 

Inflation slips below 4%, a 13-month low

Wholesale Price Index (WPI)-based inflation for the week-ended February 07, came in at 3.92% Y-o-Y, below expectations (Edelweiss: 4.06%; Consensus: 4.01%). The overall trend for prices continues to remain downward with weakening demand.

 

On a W-o-W basis, while food prices (including manufactured food products) rose marginally, softening in prices came from significant decline in prices of manufactured products. Machinery and machine tools (decline of 1.82%, W-o-W) and textiles (decline of 0.71%, W-o-W) declined significantly. Fuel group inflation increased due to higher prices of mineral oils.

 

With rapid correction in commodity prices, inflation expectations have come down significantly. Base effects for WPI inflation will also continue to remain markedly favourable in the coming weeks. Even if overall prices stay constant at the current levels, Y-o-Y WPI inflation could drop close to zero 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 because over a two-year period (beginning 2007), overall prices will still show an annualised price rise of ~4-5%.

 

More RBI action imminent

The rapid fall in inflation is providing Reserve Bank of India (RBI) additional headroom for further monetary accommodation. Weakening real economy (December Industrial Production, IP, declined 2.0% Y-o-Y) and bulging government borrowing (additional borrowing of ~INR 460 bn scheduled during February 20 to March 20) are making the case for further cuts in policy interest rates stronger. We expect reduction of 50bps each in repo and reverse repo rates (to 5% and 3.5% respectively) in February. Moreover, RBI has also announced additional quantitative measures like purchase of government securities through open market operations (OMO), to infuse liquidity.

 

Inflation softening fast globally

Globally, inflation is falling fast owing to the sharp dip in commodity prices and sluggish demand. US Consumer Price Index (CPI) declined 0.7% M-o-M in December. China's CPI during January was 1% Y-o-Y, slowing for the ninth consecutive month. CPI for Eurozone and Japan stood at 1.6% and 0.4% Y-o-Y, respectively, in December. Inflation across other emerging markets also showed a downward trend.