The disinflation trend has continued, with WPI inflation down 180bp mom to zero in Nov 2014, the lowest in more than five years. The decline has been led by a sharp reduction in fuel & power inflation (down 530bp mom) and primary inflation (down 240bp mom). Manufactured products inflation, too, eased 40bp mom to 2.4%.
Five years ago, India and the global economy responded to disinflation pressure with monetary and fiscal stimulus. Now, however, we do not expect the RBI to significantly cut rates soon with its sight set on 4% inflation. Meanwhile, the government intends to reduce fiscal deficit to 3% of GDP in FY17E from 4.1% in FY15BE. Accordingly, we believe the ongoing disinflation process should give the RBI room to lower interest rates by as much as 100bp by Mar-16.
Both wholesale and retail inflation eased significantly in Nov-14. While retail inflation should somewhat rise in Jan-Mar 2015 due to the base effect (likely to average 6%), it would still be almost 350bp lower that the level seen in FY14. Led by impact of declining international energy prices, WPI inflation will remain muted in the coming months. The RBI should start its easing cycle from Mar-15 pending more information on inflation glide path to 4% (+/-2%) after 2016, fiscal deficit roadmap and US interest rate increases.
