India's wholesale price index decelerated to 6.62% in January

Will the government cut its rates soon?

According to Morgan Stanley, the provisional headline inflation rate (Wholesale Price Index, WPI) decelerated to 6.62% YoY in January 2013 compared with 7.18% YoY in December 2012. The seasonally adjusted WPI index declined by 0.1% MoM in January. The headline inflation in January was lower than consensus expectations (as per Bloomberg survey) of 6.98% and Morgan Stanley's expectations of 6.7-6.9%.

Morgan Stanley adds, WPI inflation has been surprising positively, coming in below expectations (by 30-40bps) for the fourth month in a row. The final inflation figure for November 2012 was unchanged at 7.24%.

Here's more:

While WPI inflation is surprising positively for the past four months, other macro stability indicators – CPI inflation, trade deficit, and deposit growth – remain stretched. We believe that persistent high CPI inflation is leading to elevated and sticky inflation expectations adversely affecting deposit accretion and leading to high gold imports.

Indeed, we expect the current account deficit to have widened to an all-time high of 6% of GDP for QE Dec-12. We believe that these indicators may warrant that the policy rate be on hold for some more time.

We will be closely tracking the budget for F2014, trade deficit for Feb, and inflation (CPI) for Feb which will be released before the RBI’s next monetary policy meeting on March 19.

In our base case, we do not expect a rate cut in the March meeting. Indeed, we believe any aggressive reduction in policy rates before a meaningful reduction in CPI inflation could be counter-productive, pushing gold imports higher and the current account deficit wider.

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