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Economy
Headline WPI Inflation
January WPI: Surprises higher. India’s headline WPI surprised by jumping to 8.23% in
January 2011, ahead of our own estimates of 8.01% and also surpassing the street
estimates of 8.10%. The November inflation was revised up to 8.08% from the earlier
estimate of 7.48%. The recent trends indicate that apart from certain items on the food
articles side, the hardest pressure on Headline WPI inflation is coming out of ex-food
primary articles. We think that despite all efforts from the monetary policy side, it could
be difficult to get Headline WPI inflation down to more reasonable levels and the
Headline WPI inflation for end-FY2011E could be at around 8.11%, higher than RBI’s
estimates of 7.0% and also higher than our earlier estimates of around 7.5%.
Pressure on food inflation continues
The index for “Food Articles” group was up by 2.0% mom in January 2011 due to continuing
prices pressures from the food items. For January 2011, prices of fruits and vegetables continued
its gains over the previous months while upsides remain evident even in wheat and to a smaller
degree in rice. Overall, the prices of protein-rich items did fall in this month. Food inflation within
the primary articles remained firm at 15.6% in January 2011, even higher than the 13.5%
registered in December 2010. Food items have stayed a concern for policy makers for an extended
period now and there appear no signs of this abating soon, despite certain steps announced by
the government on January 13, 2011. Pressures out of global food prices, indicated by the IMF
food index have remained on the higher side and the latest worry comes from the global prices of
wheat that have now climbed to a 2-year high on concerns that a drought in China could be
curbing output. Over the past year, the news on wheat has not been comforting with Russia
barring exports and with floods hitting outputs in Australia and Canada. With China the biggest
consumer for grains, upside risk to wheat prices exist. Further, it can be argued that in all
possibility rice would also face an upward pressure due to substitution effects.
Trends in non-food primary articles inflation have also turned worrisome
Inflation in the non-food segment of primary articles has also been turning worrisome. For
instance, prices of raw cotton jumped by 12% mom in January 2011. With this, the inflation yoy
for raw cotton for January 2011 is up at around 49%, higher than 32% of the previous month.
The average inflation for raw cotton is at 28% in the first 10 months of FY2011 compared to
-4.5% in the same period last month. While this could represent a base effect, the build-up of the
index has also been strong. Inflation levels in sugar cane and that of minerals have also been on
the higher side. While there could be a base effect from the last year that is driving up the prices,
the build-up in the index has also been strong. And this was due to poor global supplies, rather
than supply worries domestically. Incidentally, the 2nd advance estimates put out by the Ministry of
Agriculture on February 9, 2011 indicate an expected 40% increase in the cotton output in India
over the final estimates of the last agricultural season. Similarly, sugarcane output is also expected
to have gone up by around 15% as per the 2nd advance estimates.
The heartening news: the core inflation has remained contained
WPI ex-food ex-fuel fell to 6.86% in January 2011 from 7.65% in December 2011, but most of
this rise is again on account of primary articles ex-food. On the other hand, manufactured ex-food
inflation had been dropping in the last few months to now stand at 4.79% from its recent peak of
5.7% in November 2010. We expect the Headline WPI inflation to now close in March 2011 at
8.11%, higher than the RBI’s projected levels of 7.0% and our own projections of 7.0-7.5%.
RBI’s pace of tightening would be the bigger debate
The current dynamics of India’s inflation could be putting RBI on a bit of a dilemma with
regards to the pace of policy tightening, though there is no option for the RBI but to
tightening monetary policy from here on. Given the recent trends in inflation, we have
upgraded our forecast for the Headline WPI inflation to 8.11% for end-March 2011. This is
significantly higher than RBI’s intended target, announced only in end-January 2011, at
7.0%. However, despite this upside surprise in the Headline WPI inflation, the internals of
inflation does not immediately point towards any sudden aggravation in the demand
dynamics from domestic sources. Rather, it is a result of global shocks in commodity supplies,
on which domestic policy markers would have limited controls.
For the future course of monetary policy RBI is likely to weigh the following:
Risks of a wage-price spiral emerging. Wages in India are indexed to the CPI, and food
forms a very high component of all the CPI indices. The stubbornly high food inflation,
even if due to supply-side factors, would result in headline CPI inflation remaining firm
and in-turn leading to rising wages. This can further boost domestic demand. Rural
demand is also likely to stay strong as the wages under MNREGA is now linked to CPI-AL
and the minimum number of days of work available under the scheme has also been
increased.
The oft discussed structural element to food inflation emanating from constraints in
protein-rich food items is likely to continue.
Inflationary expectations remain strong as is measured by the RBI’s household survey. Real
interest rates are still in the negative zone and this needs correction in order to close the
gap between domestic deposit and credit growths.
With problems in Europe unlikely to have been sorted out, there are chances that the
global markets return repeatedly to risk-off behavior, hence aggravating the INR
depreciation bias. This could lead to aggravated pressures on domestic inflation. On top
of this global commodity prices are likely to stay firm.
On the other hand, RBI could be worried of the recent dips in industrial production and
the implications that high generalized inflation could have on overall demand for
industrial produce.
RBI may worry that any aggressive tightening of its policy rates could lead to a sharper
decline in demand for industrial produce and in-turn affect an already fragile FII sentiment
on the domestic markets.
Overall, we conclude that the sudden spurts in Headline WPI inflation could have opened up
the risk for a mid-March 2011 upward revision in the policy interest rates by 25 bps. While
not closing ourselves totally to a change in the policy interest rates in mid-March, we would
still hesitate for the RBI to start being aggressive on monetary policy. There would be one
more reading on the IIP before the March policy announcement date and further dips in this
data after the 1.6% reading for December could prevent RBI from moving immediately.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Headline WPI Inflation
January WPI: Surprises higher. India’s headline WPI surprised by jumping to 8.23% in
January 2011, ahead of our own estimates of 8.01% and also surpassing the street
estimates of 8.10%. The November inflation was revised up to 8.08% from the earlier
estimate of 7.48%. The recent trends indicate that apart from certain items on the food
articles side, the hardest pressure on Headline WPI inflation is coming out of ex-food
primary articles. We think that despite all efforts from the monetary policy side, it could
be difficult to get Headline WPI inflation down to more reasonable levels and the
Headline WPI inflation for end-FY2011E could be at around 8.11%, higher than RBI’s
estimates of 7.0% and also higher than our earlier estimates of around 7.5%.
Pressure on food inflation continues
The index for “Food Articles” group was up by 2.0% mom in January 2011 due to continuing
prices pressures from the food items. For January 2011, prices of fruits and vegetables continued
its gains over the previous months while upsides remain evident even in wheat and to a smaller
degree in rice. Overall, the prices of protein-rich items did fall in this month. Food inflation within
the primary articles remained firm at 15.6% in January 2011, even higher than the 13.5%
registered in December 2010. Food items have stayed a concern for policy makers for an extended
period now and there appear no signs of this abating soon, despite certain steps announced by
the government on January 13, 2011. Pressures out of global food prices, indicated by the IMF
food index have remained on the higher side and the latest worry comes from the global prices of
wheat that have now climbed to a 2-year high on concerns that a drought in China could be
curbing output. Over the past year, the news on wheat has not been comforting with Russia
barring exports and with floods hitting outputs in Australia and Canada. With China the biggest
consumer for grains, upside risk to wheat prices exist. Further, it can be argued that in all
possibility rice would also face an upward pressure due to substitution effects.
Trends in non-food primary articles inflation have also turned worrisome
Inflation in the non-food segment of primary articles has also been turning worrisome. For
instance, prices of raw cotton jumped by 12% mom in January 2011. With this, the inflation yoy
for raw cotton for January 2011 is up at around 49%, higher than 32% of the previous month.
The average inflation for raw cotton is at 28% in the first 10 months of FY2011 compared to
-4.5% in the same period last month. While this could represent a base effect, the build-up of the
index has also been strong. Inflation levels in sugar cane and that of minerals have also been on
the higher side. While there could be a base effect from the last year that is driving up the prices,
the build-up in the index has also been strong. And this was due to poor global supplies, rather
than supply worries domestically. Incidentally, the 2nd advance estimates put out by the Ministry of
Agriculture on February 9, 2011 indicate an expected 40% increase in the cotton output in India
over the final estimates of the last agricultural season. Similarly, sugarcane output is also expected
to have gone up by around 15% as per the 2nd advance estimates.
The heartening news: the core inflation has remained contained
WPI ex-food ex-fuel fell to 6.86% in January 2011 from 7.65% in December 2011, but most of
this rise is again on account of primary articles ex-food. On the other hand, manufactured ex-food
inflation had been dropping in the last few months to now stand at 4.79% from its recent peak of
5.7% in November 2010. We expect the Headline WPI inflation to now close in March 2011 at
8.11%, higher than the RBI’s projected levels of 7.0% and our own projections of 7.0-7.5%.
RBI’s pace of tightening would be the bigger debate
The current dynamics of India’s inflation could be putting RBI on a bit of a dilemma with
regards to the pace of policy tightening, though there is no option for the RBI but to
tightening monetary policy from here on. Given the recent trends in inflation, we have
upgraded our forecast for the Headline WPI inflation to 8.11% for end-March 2011. This is
significantly higher than RBI’s intended target, announced only in end-January 2011, at
7.0%. However, despite this upside surprise in the Headline WPI inflation, the internals of
inflation does not immediately point towards any sudden aggravation in the demand
dynamics from domestic sources. Rather, it is a result of global shocks in commodity supplies,
on which domestic policy markers would have limited controls.
For the future course of monetary policy RBI is likely to weigh the following:
Risks of a wage-price spiral emerging. Wages in India are indexed to the CPI, and food
forms a very high component of all the CPI indices. The stubbornly high food inflation,
even if due to supply-side factors, would result in headline CPI inflation remaining firm
and in-turn leading to rising wages. This can further boost domestic demand. Rural
demand is also likely to stay strong as the wages under MNREGA is now linked to CPI-AL
and the minimum number of days of work available under the scheme has also been
increased.
The oft discussed structural element to food inflation emanating from constraints in
protein-rich food items is likely to continue.
Inflationary expectations remain strong as is measured by the RBI’s household survey. Real
interest rates are still in the negative zone and this needs correction in order to close the
gap between domestic deposit and credit growths.
With problems in Europe unlikely to have been sorted out, there are chances that the
global markets return repeatedly to risk-off behavior, hence aggravating the INR
depreciation bias. This could lead to aggravated pressures on domestic inflation. On top
of this global commodity prices are likely to stay firm.
On the other hand, RBI could be worried of the recent dips in industrial production and
the implications that high generalized inflation could have on overall demand for
industrial produce.
RBI may worry that any aggressive tightening of its policy rates could lead to a sharper
decline in demand for industrial produce and in-turn affect an already fragile FII sentiment
on the domestic markets.
Overall, we conclude that the sudden spurts in Headline WPI inflation could have opened up
the risk for a mid-March 2011 upward revision in the policy interest rates by 25 bps. While
not closing ourselves totally to a change in the policy interest rates in mid-March, we would
still hesitate for the RBI to start being aggressive on monetary policy. There would be one
more reading on the IIP before the March policy announcement date and further dips in this
data after the 1.6% reading for December could prevent RBI from moving immediately.
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