Sticky, sticky, sticky: India's WPI inflation remains high in October:: HSBC

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India
Sticky, sticky, sticky: India's WPI inflation remains high in October
As expected, October WPI headline inflation in India remained elevated at 8.6% y-o-y, despite last year's
high base and this year's favourable supply conditions. Moreover, core inflation is inching upwards and
demand-led price pressures are expected to build. This means that RBI will tighten again in early 2011,
after a brief pause.


WPI inflation rose in October by 8.6% y-o-y, the same as September's reading. This was in line with our
forecast and slightly above consensus of 8.5% y-o-y. On a sequential basis, inflation decelerated slightly
0.6% m-o-m sa (vs. 0.9% m-o-m sa in September), but accelerated on a 3m-o-3m sa basis. Overall, core
inflation (non-food manufacturing) rose to 5% y-o-y in October (vs. 4.9% y-o-y in September).

Although food inflation slowed, it remained high at 9.8% y-o-y (vs. 10.8% in September) despite the
more favourable monsoon this year and the high base from last year's dry monsoon. Non-food primary
prices jumped 22% y-o-y (vs. 18% y-o-y in September) due to an acceleration in the prices of cotton
(41% y-o-y vs. 27% y-o-y in the previous month). Prices of minerals, however, continued to grow at a
healthy but slower pace (25% y-o-y vs. 28% in September), while fuel prices were up by 11% y-o-y, the
same as in September. Manufacturing prices, commanding 65% of the basket, rose 4.8% y-o-y (vs. 4.6%
in September), with faster price increases recorded for almost all categories.

Inflation has declined in recent months due to the positive supply-side impact on food prices from the wet
monsoon, but not nearly as fast as expected. As discussed before, the sticky-high food prices can partly be
blamed on a structural and a cyclical shift towards more protein-rich foods such as meat, eggs, and fish.
However, non-food inflation is trending up and broadening, which has translated into a core inflation "flat
liner" in annual terms and a slight acceleration in sequential terms.

The fact that the elevated level of inflation is difficult to shake should be of increasing concern to the
RBI. It is sitting on the sidelines for now after its announcement of a pause and is hoping to see inflation
turn the corner and go south, but there is no clear sign of this yet. The opposite seems to be taking place
and inflation may actually have bottomed out, suggesting that some of the upside risks to inflation (ie
sticky food prices and rising demand-led pressures) are now materialising.

What we think: The inflation beast is proving difficult to tame with both headline and core inflation
remaining sticky. Combined with the shift towards more demand-led inflation as the
economy increasingly bangs it head against potential, this is going to keep the RBI
in tightening mode. We expect rate hikes to resume in early 2011 and push policy
rates up by another 125bp by end-2011.