Dr Rajan, WPI Gives You A Chance To Act On The Interest Rate Front

After the consumer price index (CPI) showed a considerable moderation, it was the turn of the Wholesale Price Index (WPI) to follow suit. WPI for the month of December 2013 has come down to 6.16% compared to 7.52% for the month of November 2013. This is much below the consensus as well as individual expectations of economists and market intermediaries. After remaining stubbornly high (at over 7%) for the three preceding months, the lowered WPI certainly comes as a fresh lease of optimism for the markets.

What has really helped in lowering of the WPI is a fall in the prices of primary articles that carry a weithage of 20.11% in the entire WPI basket. Primary article inflation has come down from 15.92% for the month of November 2013 to 10.78% for the month of December. Within primary articles, prices of food articles have come down drastically. Inflation in case of food items was down to 13.68% from 19.93% in the previous month. 

Onion prices are a classic case in point. After growing in triple digits in the last six months, these have cooled down and were up 39.56% in the month of December compared to their prices in the month of November.
Fuel and power that carries a total weight of 14.9% in the WPI has also witnessed some moderation in prices. However, it was the fall in the prices of liquefied petroleum gas that contributed to the entire fall in this category. Prices of petrol and high speed diesel were up compared to the preceding month.

Manufactured Product that form the largest part (64.97) of the WPI basket have seen a 2.64% growth in prices in the the month of December 2013 remaining unchanged from the previous month levels. Even under manufactured products it were the food products that saw a decline in prices by 72 basis points. 

With both the CPI and the WPI showing signs of moderation and the IIP having contracted for the month of November, now the worry of rate hikes will subside considerably and if inflation continues to show signs of weakness, we may in fact see some rate cuts from the end of this fiscal (FY14). The impact of this is already visible in today’s trade where major interest rate sensitive sectors like BSE Bankex and BSE Realty have put up an impressive show.