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UBS Investment Research
Asian Economic Comment
India: New CPI – higher than it looks?
�� New CPI grew 6% YoY Jan. India finally released a provisional new
CPI to cover national CPI (urban plus rural). The intention is to update and
broaden the scope of existing indices. In other words the new CPI index
should be much more representative than in the older one, but this first
number is partial – not all States’ data has been included. As the
government revises the index we think this rate could rise (from 6%
towards 8%). Another problem is there is no historic data to gauge
momentum so we can't plot a chart of new CPI versus old.
�� Starting point too low? The main areas we expect upward revisions are
in housing and possibly services. Unbelievably, housing inflation was zero
Jan-10 to Jan-11 among urban respondents. If it turned out imputed
housing costs actually grew, say 15% then this would add another 1% to
the headline rate. Other services too may experience up-creep. So even
though we believe inflation could stay soft for demand-pull reasons in
2011, the starting point of 6% in Jan appears too low. And we look for
revisions to push up the average CPI number to 7-8% for January.
�� Comparators - 3-4% higher. Another angle is to compare it with existing CPIs.
Here the new series rate is lower than any of them. Official CPI (the out-dated
industrial workers version) is the existing commonly used CPI (chart 1). It's headline
rate was 9.5%, non-food at 6% in Dec ie a good 3-4% higher than the new one. Two
years ago we set up our own CPI (UBS) using food from WPI and services from
(upgraded) GDP (chart 2). Today this shows higher headline of 11-12% with a nonfood
rate of 7.7%. Again the new CPI rate (headline & non-food version) is well
below our own. Of course our CPI inherits the added volatility of all economy-wide
agri and services prices as opposed to those just facing the household - which would
be more muted. So we expected the new CPI to be lower, but not 4%+ lower.
�� Outlook - 7% by Mar-11; 7.5% by Mar-12. From a basic monetary angle we see
broad money maintaining an 18% rate. If true, we think this consistent with 6% rate of
demand-pull inflation. However, one must make some allowance for higher oil &
food prices on top of that. The food-drought effect has more or less dropped out. For
oil we assume an average oil price of $97 bbl in FY11-12 and this could add around
1.5% to the headline rate with certain pass-through assumptions. This is our estimate
for WPI inflation and until we see a clearer picture emerge in the CPI we use the same
numbers for the CPI estimates. For policy, the RBI still needs to hike policy rates to
lean against the oil price rises even though policy rates are above our demand-pull
inflation estimate of 6%, in our view.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asian Economic Comment
India: New CPI – higher than it looks?
�� New CPI grew 6% YoY Jan. India finally released a provisional new
CPI to cover national CPI (urban plus rural). The intention is to update and
broaden the scope of existing indices. In other words the new CPI index
should be much more representative than in the older one, but this first
number is partial – not all States’ data has been included. As the
government revises the index we think this rate could rise (from 6%
towards 8%). Another problem is there is no historic data to gauge
momentum so we can't plot a chart of new CPI versus old.
�� Starting point too low? The main areas we expect upward revisions are
in housing and possibly services. Unbelievably, housing inflation was zero
Jan-10 to Jan-11 among urban respondents. If it turned out imputed
housing costs actually grew, say 15% then this would add another 1% to
the headline rate. Other services too may experience up-creep. So even
though we believe inflation could stay soft for demand-pull reasons in
2011, the starting point of 6% in Jan appears too low. And we look for
revisions to push up the average CPI number to 7-8% for January.
�� Comparators - 3-4% higher. Another angle is to compare it with existing CPIs.
Here the new series rate is lower than any of them. Official CPI (the out-dated
industrial workers version) is the existing commonly used CPI (chart 1). It's headline
rate was 9.5%, non-food at 6% in Dec ie a good 3-4% higher than the new one. Two
years ago we set up our own CPI (UBS) using food from WPI and services from
(upgraded) GDP (chart 2). Today this shows higher headline of 11-12% with a nonfood
rate of 7.7%. Again the new CPI rate (headline & non-food version) is well
below our own. Of course our CPI inherits the added volatility of all economy-wide
agri and services prices as opposed to those just facing the household - which would
be more muted. So we expected the new CPI to be lower, but not 4%+ lower.
�� Outlook - 7% by Mar-11; 7.5% by Mar-12. From a basic monetary angle we see
broad money maintaining an 18% rate. If true, we think this consistent with 6% rate of
demand-pull inflation. However, one must make some allowance for higher oil &
food prices on top of that. The food-drought effect has more or less dropped out. For
oil we assume an average oil price of $97 bbl in FY11-12 and this could add around
1.5% to the headline rate with certain pass-through assumptions. This is our estimate
for WPI inflation and until we see a clearer picture emerge in the CPI we use the same
numbers for the CPI estimates. For policy, the RBI still needs to hike policy rates to
lean against the oil price rises even though policy rates are above our demand-pull
inflation estimate of 6%, in our view.
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