The February RBI policy was pleasantly noteworthy in that it seemed to strike a somewhat less hawkish than expected tone on CPI and, by implications, on policy rates. In particular, the RBI Governor vigorously defended the continuation of a neutral policy stance, emphasizing that CPI ex HRA is still close to 4.5%. Furthermore, most of the upside risk factors to CPI noted in the policy itself were largely supply side. Whereas, there were two demand side mitigants mentioned with respect to inflation: subdued capacity utilization and moderate real rural wage growth.
We use a series of charts below to depict some of these points. Source for all data is CEIC. We have equal weighted each sub-class to arrive at the aggregate wage data.
The chart above makes 2 points: One, nominal rural wages have struggled to grow for the longest time and growth rates have in fact started to dip since mid of last year. Two, the simultaneous rise in inflation over this period, has further collapsed real rural wages. The de-acceleration in growth rate is sharper for rural agri wages as compared with rural non-agri wages as the graphs below show.
It is instructive to look at the rural wage data over a longer period of time as well. This is to contrast just what the extent of fall has been. This is done below. However, there is a ‘data break’ here between November 2013 and December 2014 which is also seen below as a ‘missing piece’ in the chart.
Turning to CPI, it is indeed quite helpful to look at various cuts of the headline CPI index. Thus traditionally, one has looked at core CPI that strips out food and fuel (including from the ‘transport and communication’ sub index). The objective behind doing this is to figure out what the ‘steady state’ impulses on CPI are. These give a better sense of what CPI is likely to be in the medium term. A similar objective is achieved by some by stripping out the top and bottom most volatile items in CPI. We have carried forward this method in the analysis below. Thus if one were to look at the CPI basket today, there are 3 items that are causing extra-ordinarily pressures (upward or downward) and are unlikely to last: 1> HRA: This is an optical effect for the most part and is soon to fade out over the past year. Since, it is difficult to exactly strip out only HRA one can more generally exclude ‘housing’. 2> Vegetables: Prices of some key vegetables have remained high over winter months and are only now coming off (vegetable index was still rising at the rate of 27% y-o-y in the January CPI print). 3> Pulses: Pulses prices have collapsed owing to overproduction due to false price signals previously. This is likely to correct in the time ahead (pulses index was falling at the rate of 20% y-o-y in the January CPI print). Thus in order to get a truer picture of CPI, one should strip out these 3 components; all of which are likely to mean revert over a period of time. This stripped out index is still almost 82% of the overall CPI index, thereby lending comfort that we aren’t losing a lot of information by stripping out a large part of CPI.
As the graph above shows, this stripped out index is only very modestly up from its all time lows hit in the middle of last year. This is unlike the headline index that had collapsed dramatically, and is now up substantially from that low. Not just this, this stripped out CPI is only at 4.1% (very close to the RBI target) and has actually fallen over the past couple of readings.
Conclusion
The charts above reiterate the point that it is as yet premature to start building in imminent meaningful rate hikes. The RBI seemed to be sending a similar message via its latest monetary policy. The data here also lends some context to the attempts being made now to enhance rural incomes. While the route taken of MSP hikes may be debatable, there is no question that wages need to go up. It is also clear that there is adequate room here for wages to rise before demand led inflation starts becoming a genuine concern for the RBI / MPC.
Disclaimer:
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
The Disclosures of opinions/in house views/strategy incorporated herein is provided solely to enhance the transparency about the investment strategy / theme of the Scheme and should not be treated as endorsement of the views / opinions or as an investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. The information/ views / opinions provided is for informative purpose only and may have ceased to be current by the time it may reach the recipient, which should be taken into account before interpreting this document. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision and the stocks may or may not continue to form part of the scheme’s portfolio in future. The decision of the Investment Manager may not always be profitable; as such decisions are based on the prevailing market conditions and the understanding of the Investment Manager. Actual market movements may vary from the anticipated trends. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. Neither IDFC Mutual Fund / IDFC AMC Trustee Co. Ltd./ IDFC Asset Management Co. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, punitive special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.