[Investors Please Listen] Inflation - hitting new lows

"Inflation Report"

 

Inflation falls further, hits a 14-month low

Wholesale Price Index (WPI)-based inflation for the week-ended February 14, came in at 3.36% Y-o-Y, in line with expectations (Edelweiss: 3.31%; Consensus: 3.40%). 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) fell marginally, softening in prices came from a decline in prices of manufactured products. Chemicals and chemical products declined significantly (1.4%, W-o-W). Fuel group inflation remained unchanged.

 

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.

 

CPI yet to show any commensurate decline

Consumer price indices (CPI)-based inflation is yet to show any significant decline. CPI-IW is still at 9.70% Y-o-Y in December 2008. This is because CPI-based inflation is dominated by prices of food articles (which have not corrected significantly). Weights of fuel group and metals (two major contributors to softening of WPI inflation) are relatively less across all CPI variants.

 

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) soon. Moreover, RBI has also announced additional quantitative measures like purchase of government securities through open market operations (OMO) to infuse liquidity.

 

Significant softening in inflation globally

Globally, inflation is falling fast owing to the sharp dip in commodity prices and sluggish demand. 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.
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