Disinflationary trends continue

On a month-on-month basis, WPI inflation dropped 0.8% in January

Wholesale Price Index-based Inflation (WPI) entered negative territory; it fell to minus 0.39 per cent y-o-y in January. On a month-on-month basis, too, WPI inflation dropped 0.8 per cent in January.

Decline in inflation reflects subdued manufacturing inflation and a sharp fall in fuel inflation. Primary article inflation did rise by 3.27 per cent y-o-y in January from 2.2 per cent last month on the back of food inflation, which witnessed an uptick at 8 per cent y-o-y as compared to 5.2 per cent in December. Non-food inflation declined by 4.1 per cent, a sharper pace of decline when compared to decline of 3 per cent in December. Rise in food inflation was on account of higher inflation in vegetables (19.7 per cent), fruit (17.2 per cent) and pulses (12.3 per cent).

The sharpest fall was witnessed in prices of fuel articles. Prices contracted by 10.7 per cent in fuel and power. Inflation dropped most in petrol (-17.1 per cent), followed by diesel (-10.4 per cent) and LPG (-7.6 per cent). Crude oil prices for the Indian basket dropped to $46.6/bbl in January against $61.2/bbl in December. We expect oil prices to remain benign. We expect crude oil prices to reach $60-65/barrel (Brent) in 2015-16 from $85/barrel in 2014-15. Prospects of lower oil prices over the medium term will also temper inflationary expectations.

Core inflation - an indicator of demand-side pressure on prices - continued its downward journey in January. Non-food manufacturing inflation fell to 0.9 per cent y-o-y from 1.5 per cent in December with the following items recording negative inflation - metals (-0.9 per cent), leather products (-0.4 per cent) and textiles (-0.2 per cent). Inflation moderated in beverages & tobacco products, wood & wood products, paper & paper products, and chemicals.

CRISIL Core inflation Indicator (CCII) - calculated by removing metal prices from the prices of manufactured articles - fell to 1.4 per cent in January from 1.8 per cent in the previous month. The reason that metals are excluded from the CCII is that metal prices are mostly determined by changing global demand-supply dynamics and volatility in exchange rate rather than domestic conditions alone.

In January, overall basic metals inflation remained subdued (-0.9 per cent) with metal and ferrous metals decline in inflation offsetting the rise in non-ferrous metals inflation (2.4 per cent). However, CCII and the non-food manufacturing inflation were at slight variance. This is because CCII includes manufactured or processed food prices which remained almost unchanged at 1.8 per cent in January as compared to 1.7 per cent in December. That said, CCII dropped by 0.4 percentage points while the decline in non-food manufacturing was larger at 0.7, against the December figures. The slight increase in manufactured food products was on account of an increase in grain mill products inflation to 3.1 per cent in January from 1.7 per cent in December. Inflation in most other categories manufactured food product categories moderated in January compared to previous month.

The GDP deflator based on the news data series shows 3.8 per cent inflation for 2014-15. The lower-than-expected inflation in the new CPI series and WPI inflation entering the negative territory makes us pencil in a repo rate cut following the Budget.