India's WPI inflation drops 2.1% YoY

By February, wholesale inflation has averaged 2.5%.

India’s WPI inflation declined 2.1% YoY to a fresh low and surpassing the trough seen during the global financial crisis.

According to a research note from Nomura, meanwhile, December reading was revised down to -0.5% from +0.1% earlier, posing downside risks to January’s print of -0.4%.

Further, so far in FY14/15, wholesale inflation has averaged 2.5% by Feb15, halved from year ago pace of 6%.

Here's more from Nomura:

Food inflation stayed relatively firm in Feb at 7.7% (vs Jan’s 8%), driven by perishables especially vegetables and pulses, but was more than offset by the weakness in most other sub-components. Fuel/power index inflation tumbled 15% alongside a sharp 25% drop in the minerals index.

These largely reflect weak commodity markets alongside a stable currency, which has helped keep a lid on imported pressures.

Of concern, the highly-weighted manufacturing price inflation also slowed to 0.3% (vs Jan’s 1%), weakest since June 2009. This validates broader concern over economic slack, pointing to excess capacity and manufacturers’ weakening pricing power.

Accordingly core WPI inflation rose 0.1% barely holding above water vs Jan’s 0.9% and down from Dec quarter’s 2% rise. Subdued WPI inflation bodes well for retail inflation in the months ahead, especially as the RBI uses the latter as the main policy gauge. Broad inflation trend is still below the RBI’s target of 6% and will keep the door open for further rate cuts but not by much.

The RBI has already undertaken two off-cycle rate cuts in January and March. These demonstrated the central bank’s confidence in the evolving inflation outlook and correction in the households’ inflation expectations.

Despite the slight overshoot in fiscal targets, the RBI endorsed the government’s move to rationalise subsidies and re-channel savings towards higher capital expenditure. With -50bp already delivered, we look for the remaining 25bp cut to be undertaken by June.

The window for further rate cuts stands to narrow thereafter as recovery takes hold, potential inflation risks emerge and as markets re-assess US Fed rate hike risks. The likelihood that the rupee will lose ground by end-year will also lead to defacto easing in monetary conditions.