Inflation WPI further contracts to 2.1%, ahead of expectations

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1 INSTITUTIONAL EQUITY RESEARCH Inflation WPI further contracts to 2.1%, ahead of expectations INDIA INDONOMICS Update 16 March 2015 WPI for Feb 15 further dropped to 2.1% from 0.4% last month. Monthly contraction was recorded in all the three segments Food, Fuel and Manufacturing. Core inflation is currently almost negligible (at 0.1%). We understand, for RBI, CPI is more significant than WPI, however, WPI deflationary trend is expected to persist until Sep 15 and is a reflection of sluggish economic demand thus cannot be fully ignored. We will be tracking incoming macro data (particularly Food and Brent prices) before taking a final call on April monetary policy stance. At the current juncture, we assign a 40% chance of a Repo rate cut in April policy. WPI Deflation progressed in Feb: WPI inflation for Feb 15 stood at 2.1% (PC estimate: 1%, Consensus estimate: 0.7%) vs. 0.4% last month and 5% last year. On sequential basis, WPI contracted by 1.4%, sixth consecutive month of decline. Food and fuel inflation drop was ahead of expectation. Contraction in manufacturing inflation continued reflecting positive impact of lower commodity prices and continuing demand weakness. Core inflation further fell to 0.1% from 0.9% last month and 3.8% a year ago. WPI deflation is expected to persist until Sep 15. Although RBI gives significant weight to CPI before taking monetary policy decision, continuing WPI deflation (also led by weak demand) may not be fully ignored. Primary Article inflation ( 1.9% mom, 1.4% yoy), Fuel and Power ( 4.4% mom, 14.7% yoy), and Manufactured Products ( 0.3% mom, 0.3% yoy). December inflation has been revised downward to 0.5% from 0.1% reported earlier. FYTD inflation stands at 2.5% vs. 6% last year. Both Food and Non Food inflation contracted: Primary article inflation contracted for the sixth consecutive month, led by a fall in food as well as non food inflation. Prices of some of the protein segments fell milk ( 0.2%), Egg/Meat (2.5%), and pulses (0.8% mom). Sharp cut in vegetable prices, down by 12% mom. Marginal (0.2%) rise in Cereals prices. Primary article inflation fell by 1.9% mom, annual growth rate at 1.4% vs. 6.3% a year ago. NFA down by 0.8% mom and Minerals by 13% mom. Fuel inflation in deep red zone: Fuel inflation fell by 4.4% mom and 14.7% yoy, led by price fall in furnace oil (14%), aviation turbine fuel and bitumen (13% each), high speed diesel (6%), petrol (5%), kerosene (4%) and LPG (3%). Impact of petrol and diesel price hike announced will reflect in March WPI. Higher brent prices (if persist) will partially reverse the inflationary and fiscal benefit enjoyed so far. Manufacturing inflation lower implying weak demand and commodity prices: Manufacturing inflation further declined to 0.3% vs. 1.1% last month. For the current month, 4/12 industries recorded higher prices (vs. 4/12 for the last month). Lower commodity prices and continuing economic weakness is resulting in lower core inflation a positive for consumers and RBI. 40% chance of Rate cut in April: Higher than expected CPI inflation, recently announced rate cut, and RBI s guidance of 4% inflation by Jan 18 has led to a consensus view of no Repo rate cut in April monetary policy. We assign a 40% probability of a rate cut in April monetary policy, as of now. We will be tracking food and fuel prices in the coming days, before taking a final call. Food inflation may inch higher due to unseasonal rainfall while brent prices have fallen in the last few days. Reasons for rate cut in April: Stable core inflation, deflationary WPI trends, RBI may want to give away one two more rate cuts before monsoon and Fed rate hike, and government s pressure to push for growth revival. WPI YoY and MoM Growth Rate (%) WPI Components (YoY Growth Rate, %) WPI and Core Inflation (YoY Gr Rate, %) YoY growth rate (LHS) MoM growth rate (RHS) Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Feb 10 Jun 10 Oct 10 Feb 11 Jun 11 Oct 11 Feb 12 Jun 12 Oct 12 Feb 13 Jun 13 Oct 13 Feb 14 Jun 14 Oct 14 Feb 15 WPI Source: Phillip Capital India Research Anjali Verma ( ) anverma@phillipcapital.in Primary Articles Fuel Manufacturing Products Core Inflation Feb 08 Aug 08 Feb 09 Aug 09 Feb 10 Aug 10 Feb 11 Aug 11 Feb 12 Aug 12 Feb 13 Aug 13 Feb 14 Aug 14 Feb 15 Page 1 PHILLIPCAPITAL INDIA RESEARCH

2 Inflation (WPI & CPI, %) Y o Y growth rate M o M growth rate Nov 14 Dec 14 Jan 15 Feb 15 Feb 14 Nov 14 Dec 14 Jan 15 Feb 15 Feb 14 WPI Primary articles (wt ) Food articles (wt ) Cereals (wt. 3.37) Rice (wt. 1.79) Wheat (wt. 1.12) Vegetables (wt. 1.74) Fruits (wt. 2.11) Milk (wt. 3.24) Eggs, meat & fish (wt. 2.41) Non food articles (wt. 4.26) Fibres (wt. 0.88) Oil seeds (wt. 1.78) Other non food articles (wt. 1.39) Minerals (wt. 1.52) Fuel and power (wt ) Manufactured products (wt ) Food products (wt. 9.97) Sugar, khandari & gur (wt. 2.09) Edible oils (wt. 2.76) Beverages & tobacco products (wt. 1.76) Textiles (wt. 7.33) Cotton textiles (wt. 2.60) Man made textiles (wt. 2.20) Wood & wood products (wt. 0.59) Paper & paper products (wt. 2.03) Leather & leather products (wt. 0.84) Rubber & plastic products (wt. 2.99) Chemicals & chemical products (wt ) Non metallic mineral products (wt. 2.56) Cement & lime (wt. 1.39) Basic metals, alloys & metal products (wt. 10.7) Machinery & machine tools (wt. 8.93) Transport, equipment & parts (wt. 5.21) Source: OEA, Ministry of Labour, PhillipCapital India Research Appendix Food article inflation stood at (7.7% YoY, 0.8% MoM), lower prices were recorded in egg (8%), fruits & vegetables and tea (5% each), moong (3%), ragi (2%) and coffee, pork, beef & buffalo meat and barley (1% each). However, the price of mutton and fish inland (5% each), arhar (4 %), poultry chicken and fish marine (2% each) and gram, condiments & spices, masur, jowar and maize (1% each) moved up. Non food article inflation rose by ( 5.5% YoY, 0.8% MoM); lower prices were recorded in guar seed (14%), castor seed (10%), raw cotton (5%), fodder (4%), gingelly seed (3%) and cotton seed, soyabean and copra (coconut) (2% each). However, the price of flowers (10%), niger seed, groundnut seed and raw silk (4% each), raw jute (3%), raw rubber and sunflower (2% each) and linseed (1%) moved up. Inflation in Minerals fell by ( 25.6% YoY, 13.1% MoM), led by lower prices of zinc concentrate (30%), crude petroleum (28%), barytes and copper ore (6% each) and chromite (1%). However, the price of magnesite and iron ore (6% each), steatite (2%) and sillimanite and phosphorite (1 % each) moved up. Fuel inflation dropped by ( 14.7% YoY, 4.4% MoM) due to lower prices of furnace oil (14%), aviation turbine fuel and bitumen (13% each), high speed diesel (6%), petrol (5%), kerosene (4%) and LPG (3%). Page 2 PHILLIPCAPITAL INDIA RESEARCH

3 Within manufacturing inflation, higher inflation was recorded in Paper & paper products (0.1%), Non metallic mineral products (2.2%), Machinery (0.1%), and Transport equipment (0.2%). Lower inflation was seen in Food products (0.5%), Beverages (0.1%), Textiles (0.2%), Wood & wood products (0.1%), Leather & leather products (0.4%), Rubber & plastic products (0.7%), Chemicals & chemical products (1%), and Basic metals (0.7%). Page 3 PHILLIPCAPITAL INDIA RESEARCH

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