0% WPI - DOES 'ZERO' HAVE THE MIGHT TO BRING DOWN RATES?

By Ruma Dubey

0% Wholesale Price Index (WPI) for Nov’14 v/s 1.77% in Oct’14.  The last time WPI was at zero or negative was July 2009.

This means there has been no change in inflation – the prices remained same, neither up nor down. This means, in November, the Indian economy was in a state of no price movement. We have disinflation – much better place to be in rather than inflation.

And before that, on Friday, we had the news that Consumer Price Index or CPI for Nov’14 was at 4.38% which was actually below the 5% target of RBI set to achieve in Jan’16. So for once, no thanks to anyone really, purely on good fortune, we have achieved the target so much ahead of schedule – a rarity in Indian context.

This 0% is not thanks to the any policy action or new rules. It was purely luck. A very good vegetables harvest, which is a typical phenomenon seen in this season, led to a huge 30% (YoY)  and 1.46% (MoM) drop in vegetable prices and it is this basket of veggies which led to food inflation falling 0.39% (MoM). Onion prices dropped 56% (YoY) though MoM rose 2.86%. On the other hand, potato prices are up 34.10% (YoY) and 1.16% (MoM).  Fruits, which are today inaccessible to most people, rose 14.78% (Y0Y), was down 4.33% (MoM).

A look into the details of food inflation shows that this was led by fall in prices of bajra, tea, fruits and vegetables, maize, barley, poultry chicken, jowar, rice and gram. On the other hand, the ‘foods’ which we use/need more, are all up – moong dal, coffee, wheat, tur dal, condiments and spices.

More than food, it was the fuel price, which had more to do with the global crude prices than any policy initiative by the Govt, which led to this 0% inflation. Fuel and power, which has a 15% weightage in WPI basket, fell 4.9%  (YoY) and decline of 5.41% (MoM) due to lower prices of furnace oil, high speed diesel oil, aviation turbine fuel, petrol and kerosene.

And then there is Manufactured Products (excludes food and fuel), which has a 65% weightage, which rose 2.04% (YoY) but fell 0.26% (MoM). In this basket, the biggest YoY price rise was led by beverages, tobacco and tobacco products, followed by non-metallic mineral products and then paper and paper products. The biggest price fall was in edible oils.

But overall trend of inflation over past six months shows that rates have been coming down consistently. WPI for June was at 5.66%, it came down marginally to 5.41% in July, then to 3.85% in Aug, 2.38% in Sept, 1,77% in Oct and now 0%.

As usual, there are doomsday messengers who say that India, like the rest of the world is heading towards deflation. We have hit 0% this month, so many are predicting a negative inflation or deflation in Dec WPI. Well, we might hit negative prices if crude continues to fall but because price is directly and tightly linked with fuel prices, if there is even a marginal increase, prices could rise. And they are now using that as a strong case for RBI to reduce rates.

Strangely, in June 2009, we did hit negative inflation at -1.91%. And mind you, that was a time when interest rates were low. By June'09, RBI had slashed rates six times since October 2008; people were urging RBI to start hiking rates.  That time too, falling crude prices were the only reason we had zero inflation and deflation.

So when it is not a systemic problem, like what Europe or Japan has how we can worry about sustained deflation? Just as this 0% is one-off, negative inflation could also be one-off.  When prices come down due to policy changes, only then can we say in the true sense that prices are falling. Today, this 0% it is more like ‘reflected consciousness’ and not ‘original consciousness’.

Going by its policy statement, RBI will clearly not get swayed by these rates. It will wait for data over the next two months and take a call only if these low inflation rates are sustained.  Best to be prepared for a rate cut by April’15.