Following Monday’s CPI, WPI inflation is on the tap today. We expect December headline inflation to inch up to 0.2% YoY from flat reading in Nov. Downside pressure from easing global commodity prices is likely to be more pronounced in the WPI index given the higher weight age to tradables in the index. Non-administered fuel products account for ~9% of the index, which increases to a third when other commodity groups are also added. Modest uptick in the food price inflation can be expected, as reflected in the retail inflation gauge.
The Reserve Bank of India (RBI) prefers the CPI index as the main barometer for policy decisions. In this regard, despite the modest uptick in Dec’s print (see Daily note on 13 Jan), the trend is comfortably below the RBI’s FY15 inflation target. While this does pave the way for rate cuts, the decision to kick start the easing cycle in February or not is likely to be a close one.
In our view, the RBI will prefer to wait until after the end-February’s budget before taking action. While the pre-condition(s) of below-target inflation and easing inflationary expectations are likely to be met, fiscal developments warrant attention.
Revenue targets look certain to be undershot this year, despite the seasonal spurt in the final quarter. In the last two years, March revenues have been more than twice the monthly average of Apr-Feb collections. Much onus thereby falls on the divestment plans, with domestic press reports suggesting lack of certainty on the proposed 10% stake sale in Coal India. In addition an estimated 20% reduction in plan spending allotments across ministries is also in the pipeline, according to the Business Standard. If this pans out, the revised plan expenditure will face the sharpest cut in the past three years.
Given the uncertainties, the RBI might prefer to monitor the content of the end-February’s budget and credibility of fiscal targets before easing rates. This suggests rate cuts might begin April 2015 onwards, with a small probability of inter-meeting cut in March.
The Reserve Bank of India (RBI) prefers the CPI index as the main barometer for policy decisions. In this regard, despite the modest uptick in Dec’s print (see Daily note on 13 Jan), the trend is comfortably below the RBI’s FY15 inflation target. While this does pave the way for rate cuts, the decision to kick start the easing cycle in February or not is likely to be a close one.
In our view, the RBI will prefer to wait until after the end-February’s budget before taking action. While the pre-condition(s) of below-target inflation and easing inflationary expectations are likely to be met, fiscal developments warrant attention.
Revenue targets look certain to be undershot this year, despite the seasonal spurt in the final quarter. In the last two years, March revenues have been more than twice the monthly average of Apr-Feb collections. Much onus thereby falls on the divestment plans, with domestic press reports suggesting lack of certainty on the proposed 10% stake sale in Coal India. In addition an estimated 20% reduction in plan spending allotments across ministries is also in the pipeline, according to the Business Standard. If this pans out, the revised plan expenditure will face the sharpest cut in the past three years.
Given the uncertainties, the RBI might prefer to monitor the content of the end-February’s budget and credibility of fiscal targets before easing rates. This suggests rate cuts might begin April 2015 onwards, with a small probability of inter-meeting cut in March.
No comments:
Post a Comment