WPI inflation down to 3-month low. Will RBI cut rate in Feb?

Wholesale price based inflation declined to a 3-month low of 1.89 per cent in November on cheaper food items, and experts predicted a 0.25 per cent interest rate cut by the RBI in the policy review in February.

The Wholesale Price Index (WPI) based inflation was 2.36 per cent in October 2024. It was 0.39 per cent in November, last year. In August, 2024, it was 1.25 per cent.

As per the data, inflation in food items eased to 8.63 per cent in November, as against 13.54 per cent in October.

The decline was led by a dip in vegetable inflation which stood at 28.57 per cent, as against 63.04 per cent in October.

Inflation in potato, however, continued to be high at 82.79 per cent, while in onion it fell sharply to 2.85 per cent in November.

The fuel and power category witnessed a deflation of 5.83 per cent in November, against a deflation of 5.79 per cent in October.

In manufactured items, inflation was 2 per cent in November, against 1.50 per cent in October.

In a research note, Barclays said wholesale price inflation softened in November, on lower primary food inflation, which more than offset higher inflation seen in manufactured products.

"December to date, global prices are up 0.7 per cent and are likely to push December WPI inflation higher," Barclays said.

As per the consumer price index data released last week, retail inflation moderated to 5.5 per cent in November, compared with 6.2 per cent in October.

Barclays said this is within the monetary policy committee's (MPC) tolerance band of 2-6 per cent indicating that CPI inflation will be drifting closer to the 4 per cent target by March 2025.

"We expect the MPC to cut the policy repo rate by 25bps in its February meeting.

"We are mindful of the almost new-looking MPC that will be in charge of this decision," Barclays said.

The government appointed a new RBI Governor earlier this month.

Former Revenue Secretary Sanjay Malhotra took over as the 26th RBI Governor on December 11 replacing Shaktikanta Das.

In October, the government had reconstituted the 6-member MPC.

ICRA Ltd senior economist Rahul Agrawal said the moderation in WPI inflation was primarily led by primary food articles, which eased to a three-month low of 8.6 per cent from 13.5 per cent in the previous month, exerting downward pressure on the headline print to the tune of 91 bps between these months.

ICRA expects the headline WPI inflation to rise to 2.5-3 per cent in December 2024 (+0.9% in December 2023) despite a favourable base.

A majority of food items, for which data is released by the Department of Consumer Affairs, have witnessed an uptick in their YoY inflation prints in December 2024 (up to Dec 15, 2024) vis-à-vis November 2024.

Additionally, the YoY deflation in global commodity and crude oil prices has also narrowed between these months, while the USD/INR pair has depreciated mildly, which would exert some upward pressure on the landed cost of imports.

Looking beyond the ongoing month, the arrival of kharif crops in the market, and the robust outlook for the rabi crop amid healthy sowing trends and elevated reservoir levels, augur well for the food inflation outlook, Agrawal said.