India Strategy Feb WPI: Remains Elevated :: Macquarie Research,

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India Strategy
Feb WPI: Remains Elevated
Event
 WPI for February higher than expected: Inflation continued to remain
elevated as WPI for February came in at 8.31% yoy versus 8.23% yoy in
January and higher than consensus expectation of 7.8% yoy. The WPI
number for Dec was revised up from 8.43% to 9.41%.
 25bp rate hike likely on March 17: Higher than expected inflation,
particularly in light of the rise in prices of non-food manufactured goods, will
likely bolster the street’s expectation of a 25bp rate hike in the forthcoming
RBI mid-quarter policy review on March 17.
Impact
 Manufactured goods led the increase in headline WPI: The overall rise in
manufactured goods inflation was 4.94% yoy vs 3.75% yoy in January; on a
monthly basis, it rose significantly by 1.3%. However the main contributors
were non-food products namely textiles (12+%), rubber products (8.26%),
basic metal alloys and products (8.6%). Prices of manufactured food
products, aided by a favourable base effect, continued to show a decline (-
0.34% yoy), mainly due to a 15.6% decline in price of sugar; however, prices
of edible oils were up 11.44% yoy.
 Primary food inflation softens further; fuel and power continue to rise:
As evidenced by the weekly trend in primary food articles, the February data
showed slower food inflation at 10.65% yoy compared to 15.6% in January,
led by monthly fall in prices of vegetables (-38%) such as onions (-49%) and
potatoes (-27%). Fuel and power inflation has sustained around the 11% mark
for the past six months and would likely move up when the recent increase in
coal prices show up next month.
 Core inflation inches up; indicating more broad-based price rise: Our
calculation of core inflation (ex-food, fuel and electricity) shows evidence of
primary goods inflation feeding into prices of manufactured goods. Core
inflation, which had so far remained sticky at around the 7% level, rose to
around 8% post this data release. We believe this trend would continue to be
the important factor going forward since inflation, which has so far been
largely limited to primary articles, is now beginning to look more broad-based.
Outlook
 Inflation may not come down to 7% by March-end: WPI has remained in
the 8-9% range for the past six months and the favourable base effect from
last year that was expected to bring down the headline number has not shown
up due to high primary food prices. This puts the government’s expectation of
inflation coming down to 7% by March-end.
 High commodity prices likely to sustain market’s worry on inflation: We
believe rising commodity prices, more so post price hikes by Coal India, pose
a threat to inflation remaining at high levels for a prolonged period by feeding
into a wider range of goods and services. This may get accentuated later in
the year in case the government decides to deregulate diesel prices