India Economy – Inflation to soften from Nov ’10: Anand Rathi

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Economy – Inflation
Inflation to soften from Nov ’10
The WPI inflation remained largely unchanged in Oct ’10 due
to increase in prices of primary articles and fuel. Despite the
festival season in Nov ’10, we expect considerable softening in
WPI inflation. Accordingly, we expect the RBI to hold policy
rates in the next mid-quarter review on 16 Dec.


 WPI inflation remains largely unchanged. At 8.58%,
wholesale price index (WPI)-based inflation remained largely
unchanged in Oct ’10 from Sep ’10 (8.62%). On mom basis, it
rose 0.4%. For Aug ’10, WPI inflation was revised to 8.82%
from 8.51% earlier.

 All major indices up. All major constituents of the WPI index
– primary (0.8%), fuel and manufacturing products (0.3% each)
– registered a rise on mom basis. The primary articles inflation
has remained in double digits for the past 14 months.

 Food prices stay elevated. Food articles prices rose 0.6%
mom owing to increased prices of meat, barley, tea and fruits,
although pulses and fish prices witnessed some softening.

 Spike in non-food articles inflation. Inflation for the nonfood
articles group (e.g., fibres, oil seeds, sugarcane, tobacco,
fodder) surged to 22.2% in Oct ’10, from 18.2% in Sep ’10. The
category contributed one percentage point (pp) to the overall
inflation in Oct ’10.

 Inflation assessment and outlook. Food articles and mineral
oils are the two biggest contributors (3.8pps combined) to the
WPI inflation at present. As the summer crop has arrived in the
market, the food articles prices are expected to soften. Also,
our channel checks suggest some softening in the food articles
category during Nov-Dec ’10. In addition, the favourable base
would result in considerable softening in the overall WPI
inflation in Nov ’10. In the base-case scenario, our basic model
suggests that WPI inflation would soften to ~6% by Dec ’10e
and to ~5.3% by Mar ’11e.

 Policy rate outlook. Though the Nov ’10 inflation figure will
be crucial for the policy rate decision, deceleration in industrial
production and likely softening in inflation in November make
a case for nil rate hike in the 16 Dec mid-quarter review of the
monetary policy. We expect inflation to start inching up after
May ’11 and, hence, a 75-bps hike each in the repo and reverse
repo rates in FY12e.