Wholesale price (WPI)-based inflation declined to two-decade lows of 0.44% for the week ended 7 March 2009.
This has again fueled expectations that the RBI would cut interest rates to spur economic growth with India’s latest quarterly GDP growth for the December quarter at 5.3%.
We present an impact analysis of the latest inflation numbers from top brokerage houses across the country.
The drastic fall in inflation can be attributed to the high base effect (7.78%). Going forward, we expect inflation to chart into negative territory, latest by the first week of April 2009 - inflation data for the week ended 21 March 2009.
We expect inflation to consequently head lower to about -2% y-o-y (also aided by the high base of last year) by August 2009.
This will be followed by a recovery in prices as lower interest rates and the Monetary and Fiscal stimuli have already aided recovery of demand for goods and services and consequently the Indian economy.
Anand Rathi Securities
The drop in inflation to 0.44% was below our (0.93%) and consensus’ (0.88%) estimates.
Components, such as food products, edible oils, transport equipment, metallic and nonmetallic products, did not change. However, chemicals and chemical products witnessed further softening.
The fall in inflation is due to the base effect – the WPI index has fallen 6.2% since August ’08.
We might witness deflation in March’09 and it could continue until October’09 (our earlier expectation as for deflation in May’09). Though food prices softened, food inflation is still relatively high.
Slow growth and approaching deflation increases the possibility of a rate cut soon. We expect the LAF (liquidity adjustment facility) corridor to go to the 2.5-4% range by end 2009.
Another 50bps cut in policy rates including CRR (cash reserve ratio) by end April’09 seem to be on the cards.
The widespread economic recession across the world has been impacting our domestic economy also which is visible from our recent economic data - IIP numbers (December and January IIP was down by 2.0% and 0.5%, respectively), contraction in exports, lower excise collection etc.
In deteriorating real economic environment, only respite for us is the falling inflation (read WPI).
With the softening in international commodity prices, domestic headline inflation (read WPI) has sharply come off from the highs of 12.91% in early August 08 to 0.44% at the end of 7 March 2009.
This speedy fall in inflation has provided additional headroom to RBI for further monetary accommodation. This affirms our belief that we are on the downward trajectory of interest rate cycle.
We expect headline Inflation (read WPI) to enter into negative territory by April and remain there till almost end of CY09.
Government has already announced three fiscal-stimulus packages in a bid to revive the sagging economy. RBI has also cut the policy rates in sync with the government actions.
However, from hereon, we don’t see much scope for fiscal stimulus packages on two grounds - fiscal health already in bad shape and model code of conduct coming into force after announcement of election dates.
Hence, we expect policy makers to rely more on monetary policy instruments rather than fiscal policy instruments.