Deflation is now in the picture. Can the RBI handle the pressure?

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Yesterday, we wrote about how the RBI is under heavy pressure to cut rates by none other than Finance Minister Arun Jaitley.

We also wrote that at noon, the WPI Inflation figures would be released, with an expected figure of 1.5%. We wrote about how, with low inflation and a falling Sensex, there is tremendous pressure for the RBI to cut rates.

Well, WPI Inflation came in at 0%. That's correct- it came in at 0%!

Here's the chart of WPI Inflation from 2010 onward.


Isn't that incredible? It almost seems like the 0% was mistakenly released. It is such an outlier that one does not really know what to make out of it.

When inflation falls below 0%, the term is called "deflation". It is rare; usually, economies are stuck with high inflation and have to fight all sorts of battles to bring inflation down. In this case, we have a situation where prices are, in essence, lower today than they were a year ago.

The result is generally not good. Companies end up having less pricing power and are forced to lay off employees in order to prevent profits from eroding.

Furthermore, the Rupee has been showing signs of weakness as it continues to slide against the dollar.

A rate cut would be ideal in this situation. Immediately, funds would be invested back into companies and the markets would rise, once again. Last week's weak manufacturing numbers (India Industrial Production) showed that the economy's biggest pillar, manufacturing, was not booming at the rate that it was expected to. After all, the "Make in India" movement was centered around manufacturing; yet, exports are in single digit growth while imports continue to grow, causing a widening trade deficit.

The RBI seems unfazed. It has stated that it will wait for December inflation figures to be released, expecting a sharp increase in inflation and not placing the stock markets as a priority item on their agenda list.

Let's hope that the RBI is playing its cards right.


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