India's WPI deflation close to its end

India's WPI deflation eased to -0.7% YoY in December (consensus: -1.1%, DBSf -0.5%) from -2% in November, on a sharp jump in food prices and fading base effects from weak commodity prices. Food inflation jumped 8.2% YoY from Nov's 5.2% on firm vegetables, pulses and protein costs, but is expected to taper off into the Mar quarter as base effects turn favourable. The retail inflation breakdown had also seen the seasonal influence of winter crop and improved supplies ease food prices on the month, but up on the year. 

The contraction in the fuel and minerals index eased slightly on base effects. The fuel (and power) index inflation fell 9.1% vs Jul-Nov's -14.6%, while the minerals index fell 22.5% vs Jul-Nov's -32%. While the renewed fall in global commodity prices will pile downward pressures on these indices, base effects could see deflation in these categories ease further in Mar-Jun16 quarters. 

The key manufacturing gauge meanwhile fell -1.4% YoY, steady from the month before, highlighting subdued pricing power amongst manufacturers, weak profitability and over-capacity issues. With tradables accounting for a significant chunk of the wholesale price basket, the disinflationary trend here signals the absence of manufacturing/ global price pressures. Nonetheless, fading base effects are likely to lift WPI inflation back in black in the Mar16 quarter. 

Inferring from the movements of the key CPI inflation gauge, the Reserve Bank of India's target of 6% for Jan16 will not be breached, supporting the easier policy stance adopted in 2015. FY1516 CPI is expected to average 5% and inch up to 5.4% next year. On policy, beyond an on-hold in February, a small window to lower rates might re-emerge when base effects suppress readings around mid-year. Other factors including monsoon progress, aggregate demand conditions and fiscal consolidation need to fall into place to comfort policymakers.