The Wholesale Price Index (WPI) for January came in at negative 0.39 percent versus CNBC poll of 0.15 percent, on account of further slump in oil prices slumped, bolstering prospects for another round of interest rate cuts by the Reserve Bank of India (RBI). The WPI data, witnessing its biggest decline since June 2009, shows a decline in core inflation but food prices accelerated to a six-month high of 8 percent from 5.20 percent in December.
Meanwhile, the November WPI data has been revised further lower to negative 0.17 percent from zero.
As long as the WPI remains benign, the RBI will take comfort from the fact that all segments are trending downward, says Samiran Chakraborty of StanChart. He thinks the oveall trajectary could go down by 40 bps. "We think another 75 bps rate cut is likely over next few policies," says Samiran adding the WPI is the best supporting evidence that inflation is on a downtrend.
Indranil Pan, says the food inflation trending up is because this time of the year vegetable and cereal prices move higher. But it is not a worrying factor since the food price cycle will go lower next time.
Speaking about the possibility of a rate cut, Charraborty said: "If we have a good Budget and a good CPI print and if the RBI does not do an intermitting rate cut, then the April rate cut could as well be 50 bps." Indranil Pan too sees first rate cuts coming in April policy, but is betting on a 25 bps rate cut.
Below is the transcript of Samiran Chakraborty and Indranil Pan's interview with Ekta Batra on CNBC-TV18.
Q: It is a deflation of 0.4 percent, big surprise and your thoughts?
Chakraborty: We were looking for a more flattish kind of a wholesale price index (WPI) so it is a little bit of a surprise. WPI numbers have been printing at much lower levels compared to consumer price index (CPI) because of good reasons because it captures the global commodity price fall better than the CPI does and also the disinflationary trend in the manufacturing component, which is a larger weight on WPI is having a role to play. What would be interesting is that while the WPI month-over-month is showing a decline, the CPI month-over-month is higher. So that divergence at some point of time will get corrected, let us see how it pans out.
Q: Going by the data would that be a correct assumption that fuel and power inflation, which declined 7.8 percent in the previous month has now declined further by around 10 percent this month, the reason why we are seeing this deflation come through?Chakraborty: Yes that is definitely a big positive but what we have to keep in mind is that yesterday the petrol-diesel price has been hiked. So from now onwards, we could see a little bit of a correction in this trend but what is even more interesting is that the food inflation has shot up quite rapidly in WPI from very close to zero percent a few months back, it is now up to about 8 percent now -- it shows you one thing which is that the decline in food prices which generally happens during November-December-January this year that decline has not been as sharp as it was last year. So from that perspective, we have to keep a little bit of a doubt in our mind that with a lag this will have an impact on CPI as well particularly on the food side. The manufacturing inflation decline is definitely a positive, last month it was about 1.6, now it is stunned down to about 1 percent. So clearly that disinflationary process on the back of lower input prices is continuing.Q: What about the fact that the November inflation data has now been revised to a deflation on 0.17 percent as opposed to 0.0 percent earlier, would that give you more confidence that the trajectory of WPI is now on the lower side and something that the RBI will take into cognizance as well?Chakraborty: We know that RBI is focusing more on the CPI than on the WPI. So as long as the WPI remains very benign, I don’t think every change in WPI, every revision would be looked at that closely by RBI. It is going to take comfort from the fact that all the inflation indices are now pointing downwards. I don’t think there is a reason why RBI would be too worried about the deflationary environment looking to the WPI prints at negative. As long as the CPI print is not showing any deflationary sign, I don’t think we will get a response from the Central Bank, which is to control deflation. Q: What is your reading on the data as well as the food inflation which has seen a little bit of an uptick this time?Pan: Food inflation anyways -- we were not seeing an uptick even in terms of our own estimates in the sense that this is the time when actually vegetable prices tend to go higher and cereals possibly also has sort of moved a little bit higher. So I am not worried about the food on the other side because as Samiran Chakraborty was rightly pointing out, the focus of the RBI is more on the CPI and in the CPI the food overall weightage has come down to a certain extent. So that doesn’t worry significantly at this point except for the fact that we would go through another monsoon period soon and we will have to therefore wait for the initial estimates from that side.
Q: Where does this leave the RBI, does it give you more certainty about further amount of rate cuts or larger amount of rate cuts this fiscal which a lot of economists were talking about post the CPI data? Pan: We are still sticking to our additional 50-75 bps from nowon and simply because I think 1.5-2 percent real rate that the RBI is looking at gels in with this 50-75. So based on the WPI, which we were anyways expecting to go down in to the negative territory and having also looked at the CPI, we have not changed our forecasts on the rate cutting cycle, the extent and the depth of the rate cutting cycle of the RBI. Q: What would your thoughts be come the April policy? Chakraborty: After the new base year revision in CPI, we think that there is a possibility that the overall trajectory for CPI could come down by about 40 bps. So from that perspective, we are now looking at an average CPI forecast for FY16 at 5.4 percent. That gives us confidence to think of another 75 bps of a rate cut from where we are today in line with 150-200 bps real policy rate corridor indicated by RBI. The risks are to the downside because if oil prices stay very low, you could see inflation to be even lower. I think the WPI at this moment is at best supporting evidence towards this inflation decline. I don’t think there is any kind of a lead lag going on here between WPI and CPI, which will worry RBI. So at this point looking at about 75 bps of a rate cut over the next few policies. Q: What can we expect in terms of an inflation trajectory for WPI in the next two-three months based on what you are seeing and the fact that maybe there is a little bit of an inch up that we are seeing in brent crude prices? Chakraborty: The WPI could move up a little bit from where it is today but since we are already in a kind of sort of deflationary territory that should not worry RBI a whole lot. Again the focus is going to stay on CPI, even on CPI till about March, the numbers are going to be slightly elevated but come April to September period is when we expect the CPI to be in its most benign phase and then probably the October-December quarter is when it is going to move up again a bit. But we don’t think it is a big issue of RBI not meeting their 6 percent January 2016 target; that should be achieved quite easily. So from that perspective also, some amount of rate cuts probably in a front loaded fashion will be quite possible. Q: Have you managed to calculate the core CPI? Chakraborty: Since the manufacturing CPI has dropped very substantially from 1.6 to 1.05, I think you should expect the core CPI also to drop from 1.3 number that we had seen last time. Q: Closer to 1 percent? Chakraborty: I think so. Q: What would your thoughts be in terms of maybe the future trajectory of WPI and like Samiran mentioned April to September what would your figures be like? Pan: I broadly agree with Samiran Chakraborty in terms of the bump down that the average could see over the next financial year. So we are also working with an average of 40 bps lower from our previous average. So that is the reason I mentioned also that 50-75 bps. Now the differential between 50 and 75 bps additional rate cut from the RBI comes from our thoughts on the currency side in the sense that if there are negative repercussions out of the global scenario, which leads to some amount of currency depreciation then the RBI possibly might want to stop at 50 bps additional from now rather than 70 bps, which is determined by the 1.5 percent real rate. So at that point in time they could be looking at a 2 percent real rate rather than 1.5 percent real rate and that is the reason why we have a 50-75 bps additional from the RBI. Q: What would your thoughts be on fuel and power in terms of a trajectory going forward, it is now at least declined or in deflation for the past three months as per my data and it could be for more but what could we expect in the coming months? Pan: My first thought is that fuel anyway is very volatile component even today because as we talk and as we sat through the weekend, we have seen the oil prices brent crude inching up towards USD 61 per barrel and that is because the oil rigs in the US has come down very sharply. Going forward, most of the estimates and the estimates that we are working with in terms of the crude is broadly USD 60-70 per barrel, which to a certain extent will be also determined by the stand OPEC takes around the June or July of 2015. So we are not looking at USD 20 per barrel on the oil side, we are looking at relatively USD 60-70 per barrel and if I am talking of even a currency depreciation relative from this point, I don’t think there is the similar benefit that will be repeated in the next few months.
Q: What about you in terms of food inflation? Chakraborty: As I was saying that the decline in food inflation that typically happens over this period -- the decline this time around looks like in the index has not been as much as last year, which has resulted in the year-over-year numbers being somewhat higher. We are observing that the global commodity price softening particularly on food is continuing. That is one positive. The second is rural demand decline is also continuing, which is another positive for food inflation but not enough of structural supply side reforms have been undertaken as yet which keeps us worried that if there is any kind of a negative supply side shock on food then that can amplify into another significant risk in the middle of the year particularly if the monsoon is not that good but if we have a good monsoon then we should see food inflation returning back to 5 percent or below -- not at more than 8 percent which it is today. Q: What are your final thoughts in terms of how the RBI is going to read this number and if in case there is a rate cut that you envisage, when will it be, will it be post the Budget, pre the April policy date or on the April policy date and how would the WPI data be factored in to the RBI’s decision? Pan: WPI I don’t think is a major decision maker. I think the CPI is. That is number one. Number two is that we are not likely to see post the Budget simply because with the new based CPI and the new based GDP, the RBI would possibly need a couple of more data points to analyse the overall impact that is there on the economy. So our bet is April 7 and 25 bps. Q: How important would the fiscal deficit data be? Pan: Fiscal deficit numbers would be important but as I said that we are broadly working with a trajectory where we would meet 3.6 percent and there is an additional sort of expenditure allocated for plan but as I said the theoretical issue for the RBI also will be the CPI and they would like to see one more print at least in terms of the extent of the deflationary trend before they react. Chakraborty: I think the fiscal number is important if we get a good Budget where RBI’s precondition of high quality fiscal consolidation is maintained then we cannot completely rule out an intermitting rate cut post the CPI number on March 12. But typically RBI would not like to have too many intermitting rate cuts, so that might mean that rate cut is deferred to April. But if we have a good Budget and a good CPI print and if RBI does not do an intermitting rate cut then the April rate cut could as well be 50 bps rate cut.
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