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EYE ON INDIA: INFLATION
Wholesale Inflation continues to fall as fast as it rose last year…

Weekly WPI data released by the Ministry of Commerce and industry yesterday arrived at 5.28% -down from last week’s 5.91%, signaling that the trajectory of falling inflation on the subcontinent has yet to change.

The real test for the coming weeks is whether WPI declines will taper off in reaction to the relative buoyancy of several key commodities in recent weeks. The wholesale price index, represents a basket of 447 items within the three sub-indices; manufactured goods, accounting for 63.7%, primary articles at 22%, and food and energy at 14.2%. Plainly speaking, if metal and energy products begin to show signs that they are finding their feet but the corresponding WPI inputs continue to fall off it will quickly become clear how significant a factor domestic demand contraction is.

Part of our India thesis has always been that the majority of the population there, particularly the rural poor who did not share in the prosperity of the recent decade, will be unable to make up for cooling external demand nor do we believe that any public works projects or other measures enacted by Prime Minister Singh’s government will be enough to stem the tide. The reversal of foreign investment, the decrease in equity issuance and a massive national deficit will neuter any impact of the second monetary and fiscal stimulus package announced on January 2nd.

As always however, we are data dependent and stick to our process: If the data suggest that the stimulus is working then we will we rethink our stance. We Shorted IFN into strength on Tuesday and again today. For the time being, we continue to see the Indian economy as one of the weakest hands at the table among the major Asian economies.

Andrew Barber
Director