MACROS READWholesale inflation drops on back of softer oil pricesNEW DELHI: Inflation based on India's wholesale price index (WPI) fell below last year's level in January because of softer crude and commodities, boosting the case forinterest rate cuts by the Reserve Bank of India to lift demand as some experts warned of deflation in manufactured products.WPI inflation was at a negative 0.39% in January against 0.11% in the previous month, the second deflation in three months, data released by the ministry of commerce and industry showed on Monday. November inflation was revised down from zero to (-) 0.17%.

"The absence of price pressures at the producer level should feed through to weaker inflation at the retail level eventually and we therefore expect CPI (consumer price index) inflation to remain range-bound at the 5% level," said Pranjul Bhandari, chief India economist, HSBC, in a note penciling in a 25 basis point cut in March-April.Retail inflation, which guides central bank policy, rose 5.11% in January based on a revamped CPI, below the consensus estimate and slower than RBI's March target of 6%. RBI governor Raghuram Rajan kept rates unchanged at the February 3 monetary policy announcement after a surprise 25 basis point cut on January 15.The central bank said further rate cuts would depend on the inflation trend and the fiscal stance of the government, with the February 28 Budget expected to provide a clear picture of the latter. Shubhada Rao, chief economist, Yes Bank, felt at least one of the conditions has been

met.  "The revised CPI inflation series significantly undershooting RBI's envisaged trajectory should give RBI the comfort to ease its monetary policy by an incremental 50 bps in FY16, in our opinion," she said. Industry renewed calls for a rate cut."Given the continuing trend of moderate inflation both at the wholesale and retail level and the fact that a durable recovery in the industrial sector is still out of sight, we hope that the central bank would continue with the policy rate cut cycle after the forthcoming budget," the Federation of Indian Chambers of Commerce and Industry said in a statement.The demand for rate cuts had become blunted after numbers based on a new series showed the economy growing by a strong 7.4% in the current fiscal.

However, with December's industrial growth coming in at a weak 1.7%, the case for a rate cut was strengthened.To be sure, crude oil has jumped from a low of about $45 per barrel in January to more than $60 on Monday while food prices have inched up. Inflation in vegetables shot up to 19.74% in January, snapping seven months of a deflationary trend, and wholesale inflation in food articles climbed to 8% in January from 5.2% in December."The increase in the price of the Indian crude oil basket and retail prices of diesel and petrol is expected to push up the WPI index on a month-on-month basis," said Adityi Nayar, senior economist, ICRA.However, some economists are more worried about falling manufactured product prices, signaling weak demand. Manufactured product inflation eased further to 1.05% in January.In line with this trend, core inflation, which measures inflation after excluding volatile food and fuel elements and is considered a measure of demand, moderated further to 0.9% in January compared with 1.58% in December, the lowest since November 2009.Fuel and power deflation deepened to 10.69% in January compared with 7.82% in December. The sharp recovery in global crude oil prices may likely reverse the deflationary trend in domestic fuel. Petrol and diesel prices were hiked by 82 paise and 61 paise a litre, respectively, on Sunday.The rate cut outlook will depend on what the RBI makes of all the latest data, including the growth numbers.Four reasons why the scales are tilting towards IndiaGlobal investors should turn their attention to India. Here’s whyStock prices have soared over the past year and the bellwether indices have gained more than 40 per cent. But earnings of Indian companies are faltering.Have stock markets rallied too early and is there a strong case for prices to decline from these levels? While the turnaround in the profitability of India Inc is taking time, there are a number of factors that are in favour of the Indian economy at this juncture.These will eventually translate into better financial performance of Indian companies and better returns on investor holdings over the next couple of years.Fall in commodity prices

Commodity prices have been trending lower for almost three years now as global economic growth slowed and China re-balanced its economy. The Thomson Reuters core commodity index, one of the gauges to measure global commodity prices, is down 38 per cent since its peak value in mid-2011.But the sharper decline took place from June 2014; the index has lost 27 per cent since then. This is largely due to the halving of the price of crude oil since last June. Petroleum-based products contribute to 33 per cent of the index weight.The fall in commodity prices is a blessing for Indian companies that are net importers. The impact was already felt in the December quarter earnings with raw material cost as a proportion of sales recording a decline over the same period a year ago. Unless companies decide to pass on these benefits to customers, this will help them improve their profitability in the coming quarters.Strong economic growth

According to the IMF’s world economic outlook report, India is set to report one of the highest GDP growth rates in 2016, thanks to “the boost to the terms of trade from lower oil prices and a

pick-up in industrial and investment activity after policy reforms.” Indian growth is expected to reach 6.5 per cent in 2016. This is higher than China’s 6.3 per cent and the global average of 3.7 per cent growth.Many of the other emerging economies that were vying for a share of the global investment pie have been hit hard by the plunge in commodity prices, since they are commodity exporters. Growth in Russia, Brazil and South Africa is expected to contract by -2.5, -0.7, and -0.3 in 2016. With India set to record a far superior growth when compared with other economies, foreign investors, both foreign portfolio investors as well as those bringing money into FDI, are likely to prefer investing in India, thus supporting the Indian stock market and the economy.Real rates turning positive

The decline in commodity prices has been a godsend for India’s inflation too. Consumer price inflation is down to 5.1 per cent in January 2015. Fall in inflation is good for companies since it means saving on input costs and higher demand due to larger surplus in the hands of the consumer.From an investment perspective too, the declining inflation spells good news since some of the surplus will be ploughed into savings. Again, with the Reserve Bank of India going slow with its policy rate cuts, the real rates in the economy are currently more than 2.5 per cent. These rates are among the best in the world and are certain to act as a draw for global investors in debt securities.Foreign investors have already purchased close to $4.7 billion of Indian debt since the beginning of 2015.The positive real yield will also result in household savings — which was moving into physical assets such as real estate and gold over the last few years — moving into financial assets. With the RBI announcing its intention that the rate cycle has reversed downward, stocks are likely to generate greater interest than fixed income.Rupee on a strong wicket

Despite intense volatility in foreign currency market in recent months with dollar surging and euro caving in, the rupee has proved quite resilient, moving between 60 and 64 against the dollar. With the decline in crude prices, the current account deficit is no longer a threat. While declining growth in exports is adding some pressure on the currency, healthy interest from foreign portfolio investors as well as foreign direct investment is helping keep the rupee stable. FDI flows in the period between April and November 2014 are up 22 per cent over the same period a year ago.The recent monetary policy statement of the RBI indicates that the central bank is expecting the fund inflow to continue in the months ahead, thanks to the €1.1-billion stimulus announced by the European Central Bank to shore up European economies. Foreign investors searching for a country with good economic growth and positive real rates are likely to continue pumping money into India. With interest rate cycle reversing downwards, debt-laden companies in India are expected to get a reprieve. The joker in the pack is the implementation of policy reforms that is needed to get stalled projects going, make fuel available for our power sector and encourage foreign investment into the country.If the Modi government delivers on this front, India can exceed the growth projected by the IMF in 2016.__________________________________________________________

6.9% growth? World laughing at this bad jokeFormer central bank governor Dr Y V Reddy once quipped to me that while the future is always uncertain, in India even the past is uncertain, given how often the government revises economic data. Even by that standard, however, the dramatic upward revision of the GDP growth rate is a bad joke, smashing India’s credibility and making its statistics bureau a laughing stock in global financial circles.The new and not-so-funny numbers show that the Indian economy grew at a pace of 6.9% in the last fiscal year, a claim that is fantastic in the extreme. Many Indian economists have set out to show that the new growth numbers for the economy as a whole simply don’t add up, as a sum of the parts. Every piece of data — from the tepid increase in corporate revenues to imports, credit, rail freight and auto sales — points to a much lower growth figure, probably closer to the old estimate of 5%.Surprisingly, for a country obsessed with its GDP growth rate, there is not much outrage at this travesty, either in public or at cocktail parties. In the past, India’s habit of revising economic data was confined to relatively minor tweaks, but this latest update is a wholesale rewriting of history. In the international financial community, no one had questioned the veracity of India’s economic numbers, until now.This makes India look bad even compared to China, which many analysts have long suspected of massaging GDP figures to show steady growth. But the same sceptical analysts admit that when China manipulates its numbers, it does so carefully and only when the actual growth rate falls below its official target, as it has of late. The authorities seem to know exactly what they are doing. India’s new GDP data clashes even with the pronouncements of some government and central bank officials, suggesting that the left arm doesn’t seem to know what the right arm is doing.The whole episode is reinforcing the bad rap India gets for poor governance standards. To be sure, many emerging nations including Turkey and Nigeria have issued flattering upward revisions of their growth data in recent years, but generally without eliciting peals of laughter. Last year, Nigeria issued a revision showing that the economy was nearly twice as large as previously reported, but it was widely accepted because the new methodology was well explained and had the endorsement of the International Monetary Fund.The IMF in fact recommends that, every five years, countries update the base year they use to calculate the pace of growth in the economy. The idea is to capture the impact of new growing industries, and Nigeria hadn’t updated its base year since 1990. India’s last revision came in 2010, so this one came on schedule. Only the statistics bureau clearly rushed it into print, without conducting even an elementary ‘smell test’ to ensure that the new numbers square with the reality on ground. One clear sign of the bureau’s haste to publish is the fact that it released revised data for only the last two years, making it impossible to see the long-term trend for India’s growth rate.Nobody really believes that the Indian economy grew at anywhere close to 7% last year, and shockingly no one is willing to put an end to this nonsense. When India delivers its budget on February 28, officials are likely to claim that economic growth in the coming year will accelerate to around 8% — a figure based on the new series. A forecast based on dodgy numbers will only cast doubt on India’s claim to be the world’s fastest-growing large emerging market, though that claim could easily prove true in a couple of years, based on credible numbers.At a time when the world economy has slowed to a pace of just 2.5%, close to the level that feels like a global recession, many analysts cite India as one of the few economies in which the growth

outlook could brighten. If India’s growth rate accelerates, legitimately, from the current rate of around 5% to a rate of 6 to 7%, it will be widely hailed as a remarkable achievement, particularly when most emerging nations including China are slowing down sharply. Instead, serious analysts are left scratching their heads over the statistics department’s new data, and every story about India’s economy now includes at least a jarring footnote about its not-so-funny numbers. The government needs to resist the temptation to celebrate India’s economic success, based on this dubious data. The better part of political and economic wisdom would be to say that until more details are available, and until the new data meets more global standards, the government will continue to use the old series. Good governance is based on credibility, not a willing suspension of disbelief.___________________________________Indian economy seen growing 7.8 per cent next fiscal: DBS NEW DELHI: The Indian economy has bottomed out and it is expected to grow at about 7.5-7.8 per cent in next fiscal beginning April 2015, DBS Group Research said today. 

"Implications of this revised set of data (on GDP and inflation) on other economic aspects are ascertained. Nonetheless, lead indicators affirm that the economy has bottomed out and is bound to improve from here on. 

"GDP growth in 2015/16 could be in the range of 7.5-7.8 per cent, lifted by a firm manufacturing sector and robust domestic demand," the Singapore-based research firm said. 

It said interpretation of new set of data by Reserve Bank and Finance Ministry will be watched closely, specially for monetary policy and fiscal policy guidance. 

India recently rebased and revised its Gross Domestic Product (GDP) growth numbers. Apart from a change in base year, the revised methodology includes private corporate performance as well as sales and service taxes, which have lifted growth for industrial and service sectors. 

On inflation, the researcher said there is a room for rate cuts as prices have been falling. 

"Given the prospect of sub 6 per cent CPI (Consumer Price Index) inflation in 2015-16..., there is room to cut another 50 basis points by June quarter." 

RBI in a surprise move in January, slashed the policy rate by 0.25 per cent to 7.75 per cent after having maintained a hawkish monetary stance for over one-and-half year. 

However, RBI is still to factor in the revised growth estimates, which might alter the policy stance, it added. 

Speaking with reporters at a conference here on the performance of NDA-led government so far, DBS Bank India Managing Director and Head of Treasury & Markets Vijayan Subramani said, ""Upto now they have done everything positive in terms of governance. I would view it as positive. I don't think there are too many choices." 

On Union Budget 2015-16 to be unveiled on Saturday, he said it can be a sensible budget

without expecting too many histrionics. ________________________________________________________________

Why Indian economy needs cheap oilA fall in global oil prices provides India with the opportunity to strengthen its balance sheet, Deputy Governor of the Reserve Bank of India, HR Khan, said on Monday, alluding to the need to use savings to invest, build reserves and cut subsidies.India imports nearly two-thirds of its oil requirements and a lower oil import bill is likely to help slash the country's current account deficit, as well as help ease inflation.The government's Annual Budget, due to be presented on Saturday, is widely expected to include cuts to subsidies, but not by as much as some investors had hoped for. "The oil price going down is an opportunity which should not be wasted and we should be bolstering our balance sheets," H R Khan, said in a speech to management students.India's fuel subsidy comprises about a quarter of the total subsidy amount of nearly Rs 2.6 trillion ($41.81 billion) and the fall in oil prices provided the government room to impose an excise tax which is expected to earn an additional of around Rs 20,000 crore.Most analysts expect oil prices to stay within $70 a barrel, which will enable the government to save on its fuel subsidy as well as mop up more revenue through excise tax.India has also strengthened its foreign exchange reserves to record highs, preparing for possible shocks including any adverse impact from an increase in US interest rates."The big risk as all of us know is of US (Federal Reserve)action - the scope, the speed and the size of the rate hike," Khan said on Monday.

Indian economy: 4 points on inflation ‘comfort'; 50-75 bps rate cut coming, says KotakThe deflationary print of inflation in January Wholesale Price Index (WPI) report was largely a

reflection of benign global commodity prices. However, the sequential momentum of both

headline and core WPI continues to move south—also reflecting weak pricing power of

manufacturers. The secular fall in WPI inflation is encouraging and with a lag should impact the

CPI trajectory too. (Read Full Report)

1. Inflation cheers continue

January headline WPI inflation surprised on the downside, contracting 0.39% from (+)0.11%

prior—the lowest to print since August 2009. The underlying sequential momentum also

remained soft, tracking ~(-)6.7% qoq, saar.

The deceleration in the headline number was largely led by the deflation seen in non-food

primary, minerals and energy components—all of which are directly linked to the global

commodity cycle. Specifically, non-food primary goods contracted for the fourth consecutive

month by 4.07% yoy, largely reflecting sharp correction seen in global fiber and oilseeds prices.

Meanwhile, minerals deflated by 13.75% after (-)8.15% previously. Both of these sub-

components contributed (-)0.6 ppt to headline print. Primary food inflation, on the other hand,

picked up to 8% from 5.20% previously, with pulses providing the upside on a sequential basis.

2. Energy inflation falls in line with softer global crude prices

The decline in domestic fuel products broadly reflects the decline seen in global crude oil prices,

helping yoy energy inflation contract by 10.69%—a significant correction from the ~7% average

inflation seen in 1HFY15.

The sub-group contributed (-)1.89 ppt to headline print. With global crude prices trending up

from the low levels seen in January and INR’s mild depreciation bias recently, the downward

bias from the energy side onto the headline numbers are unlikely to be as strong in February.

3. Core inflation softens further

Core manufactured inflation also continued with its secular decline, printing 0.9% in January

after 1.6% in December, partly reflecting soft global commodity prices.

More encouragingly, the underlying momentum has remained benign, and is currently tracking at

~(-)2.2% qoq, saar (Exhibit 1). Among the key components, ‘chemicals and chemical products’

(crude derivative) eased 0.7% while ‘basic metals and alloys’ contracted further by 0.9%.

Our core WPI inflation trajectory hints at further correction in the coming months with

expectations of relatively soft commodity prices amid only a mild INR depreciation.

4. Penciling in 50-75 bps rate cut in FY2016

Consistent decline in the inflation matrices hints that disinflationary trends are likely to sustain.

Corrections in WPI (directly a resultant of global commodity cycle) should be passed onto the

retail inflation side with a lag, hinting at a continuing soft bias for headline CPI.

The recent revisions in CPI (and GDP), as per the new methodologies, have added some

confusion around their trend inferences. However, even as forecasting headline CPI with no

back-casted history becomes difficult, there seems almost a 30-40 bps downward bias to the new

CPI on an average basis over the old CPI.

Thus, we continue to expect the RBI being on a monetary accommodation path, easing by an

additional 50-75 bps in FY2016.

By: Indranil Pan, Chief Economist, Kotak Mahindra Bank