Ind-Ra: Deflation in the Wholesale Price Index to Decline

Ind-Ra-Delhi-8 October 2015: A reversal in the base effect will lead to lower deflation in the wholesale price index (WPI) and a rise in the consumer price index (CPI) in September says India Ratings and Research (Ind-Ra). Industrial production activity however is unlikely to show a pick-up in August believes Ind-Ra.

As we move into the second half of FY16, there is considerable palpitation with respect to the health of the economy. It is still unclear whether the Indian economy is back on a sustainable growth path or if more pain persists in the system. A glance at the high frequency data indicates a mixed outcome.

While the story relating to inflation so far has been encouraging - WPI which is wholesale prices have been witnessing deflation since November 2014 and CPI based retail inflation has been less than 4% in July and August 2015. CPI inflation currently is way below the Reserve Bank of India's revised target of 5.8% by January 2016. A lot of the decline in prices has been due to the dramatic fall in global commodity prices including crude.

However, the story relating to industrial activity continues to remain far from encouraging. The index of industrial production (IIP) growth though positive now for several months is still hovering below 5% since the beginning of the year. The situation relating to trade is even more pessimistic, with exports falling on average close to 15% this year.

Ind-Ra is putting forward its forecast relating to some of the high frequency data expected next week:

IIP Growth August 2015* WPI September 2015* WPI Core September 2015* CPI September 2015* CPI Core September 2015* 4.3 -4.1 -2 3.9 4.7

Ind-Ra estimates

As the base effect in both WPI and CPI is waning, Ind-Ra expects the deflation in WPI to come down and inflation in CPI to go up from the current levels over the next few months. The scenario with respect to IIP is still somewhat unclear, though improvement in the consumer durables output is expected, in view of the beginning of the festival season.

Powered by Capital Market - Live News