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Wholesale Price Index (WPI)-based inflation was in negative territory for a fourth consecutive month, falling to -2.06 per cent year-on-year in February from -0.4 per cent in the previous month. Even if we assume inflation to be nil next month, WPI inflation for 2014-15 will stand at 2.3 per cent, compared with six per cent in 2013-15, signalling a sharp decline in inflationary pressures in the economy.
The decline in inflation in February reflects subdued manufacturing inflation and a sharp fall in fuel inflation.
Headline inflation was pulled down by falling fuel prices, owing to a sharp fall in global crude oil prices. In the fuel and power segment, prices fell 14.7 per cent. The steepest fall in inflation was in the case of aviation turbine fuel (-40 per cent), petrol (-21 per cent), diesel (-16 per cent) and liquefied petroleum gas (-9 per cent). Crude oil prices for the Indian basket remained at sub-$60/barrel in February. We expect oil prices to remain benign in the coming months, averaging $60-65/barrel (Brent) in 2015-16, against an estimated average of $85/barrel in 2014-15. Prospects of lower oil prices through the medium term will also temper inflationary expectations.
In February, primary article inflation moderated, falling to 1.4 per cent from 3.3 per cent in January. This was driven by declining prices in the non-food (-5.5 per cent) and minerals (-25.6 per cent) segments during the month. Inflation for food articles moderated slightly, at 7.7 per cent (against eight per cent in January), driven by vegetables (15.5 per cent), fruit (16.8 per cent) and pulses (14.6 per cent). In the coming months, food inflation is likely to remain high, owing to inflationary pressures in the food grain category. This is because untimely rains have damaged rabi crops. While ample stocks of wheat can be deployed to curb wheat inflation, prices of chana, mustard and barley could rise.
Core inflation, an indicator of demand-side pressures on prices, continued to fall in February. Non-food manufacturing inflation fell to 0.1 per cent year-on-year from 0.9 per cent in January with basic metals (-2.2 per cent), leather products (-1.5 per cent), rubber and plastic products (-0.4 per cent) and textiles (-1.2 per cent) recording negative inflation. In categories such as beverages & tobacco products, wood & wood products, paper & paper products, and machinery and machine tools, inflation moderated.
The CRISIL core inflation indicator (CCII), an alternative measure of core inflation, calculated by removing metal prices from the prices of manufactured articles, fell from 1.4 per cent to 0.8 per cent in February. The reason metals are excluded from the CCII is metal prices are typically determined by changing global demand-supply dynamics and volatility in the exchange rate, not domestic conditions alone.
In February, overall basic metal prices fell (-2.2 per cent), with inflation for non- ferrous metals declining (1.7 per cent) and that for ferrous metals being negative (-3 per cent). As a result, the CCII and non-food manufacturing inflation varied. Some of this gap was filled with falling manufactured food inflation, which is included in the CCII. Manufactured food inflation eased from 1.8 per cent to 1.3 per cent, owing to declining sugar, khandsari and gur prices.
Compared to 2009, the last time inflation had turned negative, the CCII and non-food manufacturing inflation have followed a similar trajectory this time. Non-food manufacturing inflation maps the CCII more closely, confirming the broad-based and sustainable decline in inflation.
The print of sub-six per cent in the new Consumer Price Index and WPI inflation remaining in negative territory provides the Reserve Bank of India (RBI) room to reduce the repo rate by 50 basis points in 2015-16. The Union Budget for 2015-16 is non-inflationary and this was reflected in the out-of cycle rate cut by RBI in the week after the Budget was announced. The government and RBI have adopted a new monetary policy framework with an inflation target of six per cent by January 2016 and four per cent (with a band of -/+2 per cent) in subsequent years. While steps by the government and RBI ensure the target of six per cent is likely to be met, squeezing inflation further will require additional efforts to improve the food supply chain.
