Visit http://indiaer.blogspot.com/ for complete details September WPI inflation: Primary articles inflation accelerates. WPI inflation for
September came in at 8.62%, marginally higher than consensus expectations of 8.5%.
The pressure came from primary articles where the index jumped by 1.53% over the
month. The July number on the old base was revised to 10.31% from the prior release
of 9.97%.
Primary articles inflation shows no signs of abating
Primary articles inflation accelerated to 17.5% from 15.8% on the back of higher food and nonfood
article prices. Primary food inflation has belied all expectations of easing and has continued
to remain stubbornly high. The food index rose by 1.6% m/m, with the y/y rate rising to 15.7%
from 14.6% last month. The stickiness in the food index, however, is stemming from ‘milk’, ‘eggs,
meat and fish’ category. In recent years, India is likely to have witnessed a shift in consumption
towards protein sources from cereals as income levels move up. As a result, demand for these food
items is likely to have outstripped their supply, resulting in unrelenting price pressures. On the
other hand, prices of cereals have moved lower, possibly reflecting the expectations of a bumper
Kharif output. Going forward, food prices may not moderate as significantly as is being anticipated
as global food prices have been firming up. On the non-food primary articles side, fibers, particularly
cotton and raw silk, are witnessing acute price pressures, with prices of fibers jumping by 9.8%
m/m taking the annual inflation rate to 27.6%.
Non-food manufacturing inflation sticky; fuel prices moderate
Non-food manufacturing inflation, which is indicative of demand side pressures in the economy,
was unchanged from last month at 5% y/y. Although inflation in non-food manufacturing has
come down from its peak of 5.9% in April, prices may not correct significantly from these levels as
global liquidity continue to push up commodity prices. In September, all the sub-indices of the
manufactured products (excluding food) increased marginally, with the exception of ‘leather &
leather products’ and ‘non-metallic mineral products’.
RBI to continue to tighten, likely to stay hawkish on inflation in November 2 meeting
IIP growth fell sharply in August to 5.6% from 15.2% in the previous month. However, this is
mainly a result of sharp volatility in capital goods production. However, in the last monetary policy
communiqué, RBI had indicated that inflation dynamics are likely to determine future policy trends.
With Headline WPI inflation at 8.62%, the real policy interest rate still remains negative and needs
to correct if the economy has to soft land.
We do not think that the RBI will be able to relax before inflation is firmly in a lower zone. For
October, inflation could continue to stay sticky in the region of 8.3-8.5% and start to moderate
significantly from around November owing to favorable base effects. Going forward, upside risks
to inflation could come from rise in the global metals and other input prices on account of
additional liquidity that could be pumped into the system via unconventional measures in the US.
For December, we now expect Headline WPI inflation to be at around 7.0-7.25%, lower than our
earlier estimate of 7.8%. This is made possible by the sudden sharp appreciation of the rupee,
likely to provide a benefit on the manufactured goods side. Further, food grains and fruits and
vegetables inflation has shown the sharpest decline in the last few months.
End-FY2011E inflation is expected to fall to a range of 6.0-6.5%, down from our earlier estimate
of 7.0%. Overall, a combination of demand side and cost push factors continues to exert pressures
on headline WPI while asset prices have once again started to move higher. We expect RBI to stay
hawkish on inflation and increase policy interest rates by 25 bps at both the upper and lower ends
of the interest rate corridor on November 2, 2010.
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