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Economy
Inflation
February WPI inflation: Waiting for Godot? February inflation numbers (again)
surprised on the upside as it increased to 8.31% from 8.23% in January. Consensus was
expecting a downward move to 7.8%. The Street has been expecting a downward trend
to emerge for quite a few months now but factors for the same have remained elusive.
This month’s surprise came from the manufactured products price index which saw
1.31% mom rise. Manufactured products ex-food inflation came in at 6.09%, indicative
that demand side pressures in the economy remain strong while global commodity prices
tend to be passed onto domestic inflation. The primary articles index saw a sequential
decline with food prices coming down significantly through the month. The rise in fuel
and power index came from the petrol price hike of Rs2.54/litre on January 16 as the full
effect of the price rise came into the index. Incidentally, the Headline WPI inflation for
December was revised up sharply to 9.41% from the earlier 8.43%.
Primary food articles inflation eases; non-food articles inflation continues to remain high
Food articles prices fell by 5.2% mom as vegetable prices finally started to move down. Food
inflation at 10.65% remained in double digits in February but at this pace it will likely come down
to high single-digits next month. Protein-rich items continued to experience high inflation with
‘eggs, meat and fish’ inflation at 14.97%. Non-food articles inflation remained high at about 30%
with a mom price increase by 4.05%. Even as the 2nd advance estimates of agricultural output
indicate a rise in cotton and sugarcane output by about 40% and 15%, respectively, price
pressures will continue as the global output of these items remains in question. With food articles
as the majority of the primary articles basket, the quantum of fall in food prices pushed the
primary articles inflation down to 14.79% (a fall of 2.9% on a mom basis).
Manufactured products inflation surprises on the upside
Manufactured products prices increased by 1.3% on a mom basis, taking the yoy price increase to
4.94%. The internals of the manufactured products index show that only 2 out of the 12 main
sub-components saw decline in prices (both on mom and yoy basis). ‘Food products’ and ‘Leather
and leather products’ registered an inflation of (-) 0.34% and (-) 1.12%, respectively. The mom
increases in the components were much higher than expected and could be the effect of high
global commodity prices feeding into the domestic prices. The core inflation, measured by
manufacturing ex-food, rose to 6.1% against 4.8% in January. WPI ex-food, ex-fuel was up by
8.38% in February compared to 6.86% in January. This indicates that demand side pressures in
the economy remain strong. The fiscal has also unleashed some demand side pull to inflation in
the form of wage indexation for MNREGA on the basis of CPI-AL.
With inflation dynamics worsening, we now expect a 25 bps rate tightening on March 17
With inflation still firmly in the 8% region, the RBI’s end-FY2011 estimate of 7% is unlikely to be
met. Also we note that core inflation has increased that is indicative of demand side pressures in
the economy. With international crude oil prices remaining firm, the risk to Headline WPI inflation
remains strong as the government will ultimately have to take a firm decision to pass on these
increases. Inflation, in our view, is likely to continue to remain sticky around 6.5-7% through
1HFY12E and any downward trend will only be evident in the latter part of FY2012E. Given the
above developments, we now look for the RBI to raise the policy interest rates by 25 bps on March
17, rather than wait it out till May. However, on a cumulative basis we expect the current interest
rate tightening cycle to end with repo rate at 7.25%-7.50%.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Economy
Inflation
February WPI inflation: Waiting for Godot? February inflation numbers (again)
surprised on the upside as it increased to 8.31% from 8.23% in January. Consensus was
expecting a downward move to 7.8%. The Street has been expecting a downward trend
to emerge for quite a few months now but factors for the same have remained elusive.
This month’s surprise came from the manufactured products price index which saw
1.31% mom rise. Manufactured products ex-food inflation came in at 6.09%, indicative
that demand side pressures in the economy remain strong while global commodity prices
tend to be passed onto domestic inflation. The primary articles index saw a sequential
decline with food prices coming down significantly through the month. The rise in fuel
and power index came from the petrol price hike of Rs2.54/litre on January 16 as the full
effect of the price rise came into the index. Incidentally, the Headline WPI inflation for
December was revised up sharply to 9.41% from the earlier 8.43%.
Primary food articles inflation eases; non-food articles inflation continues to remain high
Food articles prices fell by 5.2% mom as vegetable prices finally started to move down. Food
inflation at 10.65% remained in double digits in February but at this pace it will likely come down
to high single-digits next month. Protein-rich items continued to experience high inflation with
‘eggs, meat and fish’ inflation at 14.97%. Non-food articles inflation remained high at about 30%
with a mom price increase by 4.05%. Even as the 2nd advance estimates of agricultural output
indicate a rise in cotton and sugarcane output by about 40% and 15%, respectively, price
pressures will continue as the global output of these items remains in question. With food articles
as the majority of the primary articles basket, the quantum of fall in food prices pushed the
primary articles inflation down to 14.79% (a fall of 2.9% on a mom basis).
Manufactured products inflation surprises on the upside
Manufactured products prices increased by 1.3% on a mom basis, taking the yoy price increase to
4.94%. The internals of the manufactured products index show that only 2 out of the 12 main
sub-components saw decline in prices (both on mom and yoy basis). ‘Food products’ and ‘Leather
and leather products’ registered an inflation of (-) 0.34% and (-) 1.12%, respectively. The mom
increases in the components were much higher than expected and could be the effect of high
global commodity prices feeding into the domestic prices. The core inflation, measured by
manufacturing ex-food, rose to 6.1% against 4.8% in January. WPI ex-food, ex-fuel was up by
8.38% in February compared to 6.86% in January. This indicates that demand side pressures in
the economy remain strong. The fiscal has also unleashed some demand side pull to inflation in
the form of wage indexation for MNREGA on the basis of CPI-AL.
With inflation dynamics worsening, we now expect a 25 bps rate tightening on March 17
With inflation still firmly in the 8% region, the RBI’s end-FY2011 estimate of 7% is unlikely to be
met. Also we note that core inflation has increased that is indicative of demand side pressures in
the economy. With international crude oil prices remaining firm, the risk to Headline WPI inflation
remains strong as the government will ultimately have to take a firm decision to pass on these
increases. Inflation, in our view, is likely to continue to remain sticky around 6.5-7% through
1HFY12E and any downward trend will only be evident in the latter part of FY2012E. Given the
above developments, we now look for the RBI to raise the policy interest rates by 25 bps on March
17, rather than wait it out till May. However, on a cumulative basis we expect the current interest
rate tightening cycle to end with repo rate at 7.25%-7.50%.
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