WPI inflation drops lower. WPI inflation declined further amid lower food inflation largely mirroring the trends seen in CPI inflation. However, core inflation inched up reflecting trends in global commodity prices. WPI inflation will likely move higher in 1HCY18 implying that input prices’ inflation is unlikely to see much decline. From a policy perspective, RBI MPC will continue to focus on CPI inflation which is set to trend towards a peak of 5.6% in June 2018 and 4.7% by March 2019. We maintain our call that RBI would remain on an extended pause and assess the risks before its next move.
WPI inflation moderates on easing food price pressures
WPI inflation declined to 2.48% in February (Kotak: 2.9%; Consensus: 2.5%) after 2.84% in January. The fall in inflation was largely led by lower food inflation, mirroring the trends shown in CPI inflation. Primary food inflation contracted sequentially for the third month in a row ((-)2% mom), backed by sequential contraction of 16.7% in vegetables, 2.4% in pulses, and 0.4% in eggs, meat, and fish. Prices of cereals remained flat from last month while fruits increased 1.3% mom. Overall primary food inflation moderated to 0.9% from 3% in January (Exhibit 1). Energy inflation eased to 3.8% from 4.1% in January led by a favorable base effect even as petrol and diesel prices increased 2.0% and 2.2% mom.
Core inflation continues to inch higher
Core inflation (manufactured products excluding food) increased to 3.9% from 3.4% in January, with the sequential increase of 0.4% mom reflecting the movement in global commodity prices. Heavyweights (and global prices driven segments) such as ’basic metals’, ‘machinery and equipment’, and ‘chemicals and chemical products’ witnessed sequential increases in the range of 1-2%. Going ahead, we remain watchful of commodity prices which could further weigh on core WPI inflation. We expect WPI headline and core inflation to trend higher through 1HCY18, peaking towards 5.4% in June 2018 before easing towards 3.3% by March 2019 (Exhibit 2). On an average, we expect FY2019 WPI inflation to average at 4% as against 2.9% in FY2018.
Maintain our call for an extended pause by RBI
For policy perspective, CPI continues to remain the focus for the MPC. We expect the RBI’s MPC to maintain status quo as it awaits clarity on monsoons, sustainability of high crude oil prices post the winter squeeze, and global financial conditions. CPI Inflation outturns in 1HFY19 will be crucial in assessing RBI’s next move. However, the cautiousness from RBI is warranted as inflation through FY2019 is likely to remain close to 4.5%, higher than its stated target of 4%. Amid still-subdued capacity utilization levels and being mindful of any nascent growth recovery, the RBI would possibly remain on an extended pause. However, any sharp deviation from the RBI’s estimated inflation trajectory on account of non-transitory causes will prompt the RBI to revisit its neutral stance and move policy rate higher.
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