Tuesday, September 15, 2015

SBI - Ecowrap - Inflation numbers as per expectations

WPI inflation contracted to –4.95% (SBI at –4.68%) in Aug’15. CPI numbers printed a tad higher than our expectations at 3.66% (SBI: 3.33%). There are however, several good things regarding the inflation numbers.
First, contrary to popular belief, WPI inflation is currently not being driven only by collapse in the tradable component part, as if we strip out this segment, WPI inflation was still in the negative territory at –2.2%, in Aug’15 itself.
Second, within core WPI, the domestic core is now at –1.21%, and the pace of decline has accelerated in the last couple of months. This clearly indicates that Corporate Pricing Power is low and is corroborated by SBI Corporate Pricing index at –0.91%.

Third, on the CPI front, though the Core of Core CPI (Core CPI excluding Transport) is currently trending at 5.24%, we think a suitable to proxy to strip out the impact of fuel price decline is Headline CPI excluding Transport. This is because the RBI is targeting headline CPI and not Core CPI. This number is currently trending at 4.06%, nearly identical to RBI terminal CPI projection in 2018.

Fourth, excluding pulses, CPI is trending at 3.15%, a matter of enough comfort.

Fifth, although the Monsoon 2015 rainfall is 16% below normal till date yet the fear of high food prices and low food grain production is unfounded. Past trends indicate that we may have passed the worst, as generally, food price increase takes place in July-September and decline thereafter as new produce comes to the market. The rainfall was 16% below normal in Jul’15 and 22% below normal in Aug’15 but still the food prices have actually declined in the July-Aug period.
The chances of rate hike by Fed in Sep’15 are evenly balanced but is now more tilted towards a status quo. We continue to maintain that RBI will go for a 25 bps rate cut on Sep 29. interestingly, even as the repo rate has declined from 8% to 7.25%, there has been little transmission in g-sec market, with the 10 year yield declining by hardly 12 basis points or so since Dec, an essential prerequisite for better transmission by banks. Irrespective of such, we maintain that rate transmission by banks may be just round the corner, as cost of deposits are likely to start showing a fall going forward.

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